Our big picture for the global economy remains one of higher growth, with the US leading the global upturn. The US economy is changing for the better. Last quarter it grew at its highest pace since early 1984, with both capital spending and consumer spending posting big advances. The improvement of the job market has been the missing link in the recovery story. The recent drop in jobless claims and the rise in non-farm payrolls indicate that the employment situation has finally turned around.
Data start pointing to a brighter future for the Euro-zone as well. The German IFO index is on the rise, led by the expectations component, while the assessment of the current situation nudged higher too.
Business confidence also beat market expectations in Belgium and France.
The improvement in business confidence has not yet had a direct impact on other data. Manufacturing data continued to disappoint and retail sales were stronger, but remained at a low absolute level. Consumer confidence remained stable at low levels and unemployment has stabilised as well.
We believe that the Euro-zone economy will start to grow gradually from here, helped by growth injections from the US and Asia. The current economic environment might even be getting to a sweet spot, as core inflation is under control as it is moving between 1.5% and 2%.
The Japanese economy is also trending upward. Industrial production is at an annual growth rate of 3.4% and the latest Tankan survey pints to further strength in the months ahead. However the strengthening of the yen might have negative implications for those exporting manufacturers that have served as the driving force behind Japan’s latest economic upturn.
This is worrisome for the economy as a whole, since so far the recovery has not been supported by domestic spending.
Although our opinion is the longer term outlook for bond markets is bearish, we hold on to our neutral stance in the US, the Euro-zone and Japan for the period ahead. Of great importance here is our sentiment indicator that tells us that many investors are short duration in the US. Although the benign inflation outlook is positive for bonds, we believe that we have seen the lows in interest rates.
The last few months bond markets have been moving in a sideways pattern. We sense that this phase of stabilisation fits well within a longer term trend of higher bond yields. In our mind the next leg of the bear market will be driven by a sell-off of the short end of the yield curve, as markets will start to anticipate more imminent monetary tightening. Our overall duration position is neutral. We hold on to our yield curve flattening trade in the US.

Also we hold on to our positive outlook for investment grade credits and high yield markets. In isolation, stronger economic growth should be better for corporate credit. In this context, it appears that corporate risk premiums should continue to trade in a relatively narrow range between now and year end. As such, positive carry trades continue to make sense for corporate bond investors. In terms of sector strategy we prefer to hold on to a combination of defensive parts of the credit market with sectors with a higher running yield that the corporate average and with an upward credit rating momentum, like telecom and subordinated banking sectors.
After the setback in equity markets in September, global stock markets regained their bullish tone in October. Stronger economic data combined with solid earnings reports were the main ingredients for the rally. We continue to underweight the US equity market. Although the economic picture is supportive and corporate earnings growth looks strong, valuation is less attractive than in Europe. Therefore we keep our overweight in Europe
We also have a favourable outlook on the Japanese equity market. Japan is likely to continue to benefit more from the global cyclical upturn. This applies even more so for the Asian equity markets surrounding Japan. Combined with a very supportive monetary policy this effect starts to spill over to the domestic Asian economies as well.
Emerging markets in general are kept at a maximum overweight versus the developed markets. Healthy growth and attractive valuation levels are the main reasons behind this strategy.
Our global sector policy retains a pro-cyclical stance since we believe investors underestimate the earnings leverage the current synchronised upturn will have. Many companies that reported third-quarter results proved our point as they handily beat consensus estimates. We are overweight in the financial and IT sector and hold an underweight position in defensive sectors like consumer staples and utilities.
Marnix Vriezen is chief investment officer at Robeco Asset Management in Rotterdam

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