ABN AMRO MeesPierson: risks call for a balanced portfolio

• Positives serve as shock absorbers for increased risk of recession

• Current market climate calls for a balanced approach to investment portfolios

• Neutral equity position with defensive late-cyclical tilt

The first half of 2022 has been a bumpy ride for investors, with both equity and bond prices depressed. To a large degree, market turbulence was fanned by the serious headwinds facing the global economy. But although the risks are significant, ABN AMRO MeesPierson expects the world economy to be able to keep afloat, as noted in its semi-annual Investment Strategy published today under the title ‘A balanced approach’. “The war in Ukraine has exacerbated supply-side problems and deteriorated the inflation outlook,” ABN AMRO MeesPierson’s Chief Investment Strategist Ralph Wessels notes. “Central banks are speeding up their rate hikes and the question then becomes whether or not we’re heading towards recession. Despite the risks, we believe a recession may yet be avoided, as the economy is still benefiting from the post-pandemic recovery. Large swathes of the services sector in developed economies have shaken off the impact of covid measures and are still on the mend. In addition, we see positive factors that may serve to absorb any shocks. For one thing, consumers have built sizeable savings, offsetting falling purchasing power.”

Investing in second half of 2022 requires a balanced approach

ABN AMRO MeesPierson reckons it is a matter of striking the right balance between positives and risks for investors. As Wessels says: “High inflation, tighter monetary policy and more modest corporate earnings suggest we’re in a later stage of the economic cycle. This calls for a more defensive equity approach but should not spark excessive glumness. For this reason, we scaled back our equity weighting to neutral in February and we’re ready to adopt an even more defensive approach should the economic picture worsen even further in the months ahead.” At regional level, ABN AMRO MeesPierson prefers US equities over their European counterparts. The war in Ukraine may depress Europe’s economic outlook, while the US economy is much less likely to be so affected. Among sectors, favourites are the more defensive health care sector, late-cyclical materials and financials.

Bonds more attractive

The past few months’ rising yields have pushed down bond prices. At the same time, ABN AMRO MeesPierson reckons that higher yields have made bonds more attractive. While it is maintaining its slight underweighting of the asset class as a whole, Wessels notes that return prospects for government bonds are improving – at last: “At current yields, government bonds are becoming more attractive and can resume their position as a cushion at times of high market volatility. We continue to take a slightly positive view of higher yielding bonds, such as high-yield corporates and emerging markets debt (EMD). These bonds have been under pressure lately, but since recession is not our base-case scenario, we expect default numbers to remain modest.”

Commodities: shortages may lead to higher energy prices

On oil and gas prices, ABN AMRO MeesPierson flags up the potential repercussions of sanctions against Russia, which imply a more limited supply of some energy-related raw materials. As a result, shortages may well push up oil and gas prices going forward, it expects.

Currency markets feel monetary policy impact

Lastly, expected central bank actions are causing shifts in the foreign exchange markets. ABN AMRO MeesPierson is forecasting fewer rate hikes by the Fed and the ECB than the market is currently factoring in – which does not affect the bank’s view on the euro versus the dollar. That said, the war in Ukraine is liable to have a negative impact on the euro this year. With 2023 expected to see the spread between 10-year Treasuries and German Bunds shrink significantly, the euro should bounce back vis-à-vis the dollar in that year. ABN AMRO MeesPierson reiterates its projection of EUR/USD 1.05 by the end of 2022, while the end-of-2013 forecast was upped to EUR/USD 1.10 at the end of April.