Macro outlook - december 2010
Ronald Doeswijk, Léon Cornelissen and Lukas Daalder, Senior Strategists with Robeco’s Economic and Financial Markets Analysis team, share their outlook.
Strong manufacturing data offsets new debt crisis
News from the global manufacturing sector was generally upbeat in November. The ongoing debt crisis in Europe flared up again after the decision by Europe's leaders to facilitate sovereign restructurings in the future. A muddling-through scenario seems the likeliest outcome. Emerging markets are showing continuing strength and—here and there—rising inflationary pressures, which are being countered by cautious monetary-tightening measures.
We continue to take a positive view on equities, although we did reduce our optimism during the month, based on the growing tensions in the eurozone. So far, the European authorities have failed to come up with a credible long-term solution, which means that the problems will continue to resurface. As a result, we prefer to lower our risk profile across the board, and that includes within equities.
Real estate has experienced some headwinds in the form of higher bond yields. The current price-to-cash flow ratio for real estate is 1.75x the one for equities. That is above its historical average and reflects the attractive cap yields on offer. We do not believe the valuation premium poses a big threat to future returns and expect real estate to perform in line with stocks. We are cautiously optimistic.
On a three- to six-month horizon, we do not like the risk/reward trade-off in financials. The sector will continue to deleverage and lower leverage means lower returns. In addition, debt write-downs on sovereign-bond portfolios remain a ubiquitous risk. Earnings revisions continue to be weak, as does relative momentum, indicating that the sector is finding it difficult to generate positive surprises. Overall, we prefer cyclical sectors to financials.
Within equities, we expect North America, Europe and the Pacific all to lag emerging markets on a three- to six-month horizon. The economic outlook of the region is good. Momentum is stronger, while aging and government debt are not having such a negative impact on the long-term economic outlook as in developed markets.