Within our balanced mandates we remain slightly overweight in equities. On balance we expect the equities to outperform bonds. In the various regions equity markets profit from healthy earnings growth. In the US, however, valuation levels remain high. In the other markets, valuations are much more attractive. We expect the South-East Asian stock markets to outperform the markets in the rest of the world in the next three months. For Japan we expect a positive performance, although the outlook for Japan is still surrounded with a lot of uncertainty. The stock market in the US is expected to lag slightly the other markets, especially taking into consideration some weakening of the dollar against the euro.
For US equities we have recently upgraded our earnings forecast for this year. The better than expected performance of the Asian economies, positive earnings surprises in the first quarter and the continuing strength of the US economy were the main factors behind this upgrade. For this year we see earnings growth of 9%. For next year earnings will grow at the same pace. Although we upgraded our earnings outlook for the US stock market, we do not see a strong performance in the months ahead. The still high valuation levels and some rise in bond yields are preventing a further rise in the market.
For European stocks we see earnings rise on average by 11% this year. In contrast to the situation in the US, valuation levels are at much more acceptable levels, both absolute and relative to bond yields. As a consequence and assuming the European economy will reach the through in the short term, we think European stock markets will outperform the US over the next three months, showing a return in the range between zero and 3%.
In Japan economic indicators point to a stabilisation of the economy. In addition we see that the corporate sector has started to take measures to restructure. It is premature to conclude that the Japanese economy is finally on the road to recovery. The recent recovery is to large extent cost by government packages, while the consumer remains at the sidelines. We do think, however, that the developments warrant a slightly more positive stance towards Japanese equities. We see a total return for the next three months between –1% to 4%.
South-East Asia has shown a strong performance in the past few months. The economies have profited from a decline in interest rates which triggered some rebound in domestic demand. The accommodative monetary policy and a strong inflow of foreign capital pushed equity markets to higher levels.
Assuming this process to continue in the months ahead we expect South-East Asia stock markets to outperform the other regions in the world over the next three months.
With the sharp increase of energy prices since the beginning of the year the outlook for inflation has change slightly. In the US we witnessed a sharp increase in consumer prices in April. In combination with the continuing strength of the US economy this has forced the Fed to take a stance more biased towards a tightening of monetary policy. Bond prices reacted sharply and yields rose. For the months ahead we think market attention will remain focused on inflation news and the chance of a tightening by the Fed. For the 10-year yield we foresee a range of 5.7% to 5.9%.
In Europe no change in monetary policy is to be expected. The situation of the European economies will gradually improve further in the course of the year. On balance, some strengthening of the European economy and the impact of the developments on US bond markets will results in slightly higher bond yields. We forecast a range for European long bond yields of 4.1% to 4.3%.
Based on the above we come to an allocation as shown in the table. This asset allocation is the result of contrasting our forecast with the so-called ‘equilibrium’ returns of a client’s strategic allocation, using an asset pricing model based on historical returns.
Hans Peters is head of research and strategy at Fortis Investments Management in Utrecht

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