ABN AMRO MeesPierson: “Road to recovery not smooth”

Downward risks in short term prompt cautious investment strategy

Across the world, financial markets are still grappling with a great deal of uncertainty, which is causing major volatility and is why ABN AMRO MeesPierson is expecting downside risks in the short term. Adopting a cautious portfolio approach as a result, Private Banking has kept its slightly underweight exposure to stocks. Companies are looking at severe pressure on earnings whereas equities are substantially overvalued, with some valuation ratios significantly above their long-term averages. That said, markets are supported by the strong stimulus measures taken by governments and central banks. ABN AMRO MeesPierson has in place an overall neutral allocation to bonds and is not keen on leading government paper issued by European core countries such as Germany and the Netherlands. By contrast, it sees opportunities in emerging markets debt and investment-grade corporate bonds, the latter category receiving direct support from the European Central Bank's asset purchase programmes.

New uncertainties cloud outlook

A precondition of economic recovery is that countries manage to contain the virus and limit its impact. Whereas Europe and parts of Asia are cautiously restarting their economies, the US, Latin America and other parts of Asia are facing a record rise in virus infection rates. In the US, the large states of Texas, Florida and California are now home to Covid-19 hotspots. These states represent more than 50% of US GDP. The US Federal Reserve has underwritten trillions of dollars to support markets and corporate lending, and more fiscal stimulus looks to be on the cards. The ECB has provided European financial institutions with EUR 1.3 trillion in support so far, while Europe is also setting up a recovery fund - although this isn't signed off on by a long shot. And, while the US market has for some time outperformed European markets, over the past weeks European markets have been reversing this trend.

Europe heading for 'double dip', followed by a further uptick in 2021

ABN AMRO MeesPierson takes a more upbeat view of the longer term, predicting that economic growth will turn positive in the third quarter of 2020 in the US and Europe, but that no sustainable recovery will materialise until 2021. Ralph Wessels, Head of Investment Strategy at ABN AMRO MeesPierson, suggests the road to recovery will not be smooth: 'A 'double dip' is expected in Europe, with a return to negative growth in both the fourth quarter of 2020 and first quarter of 2021. The US is expected to escape this contraction but is also likely to face second-round effects, including higher unemployment and corporate defaults. China is further ahead in its recovery and is expected to see a 7% rebound in GDP growth in 2021.'

Given the economic impact from the Covid-19 pandemic, the expected second-round effects from the economic crisis and the fact that the virus is not yet contained in all regions, Wessels advises a more cautious stance. Much will depend on the speed of any return to more normal conditions. As Wessels observes, 'Our base-case scenario has so far been a good guide for us during this crisis. One of the final elements of the base case is the transition out of the lockdown phase to more normal circumstances. Over the summer, we will know if this transition is sustainable and at what speed it will continue. Meanwhile, investors will have to decide to what extent recovery has been priced in already.'