In ABN AMRO’s asset allocation for the first quarter, we overweight equities and underweight bonds and cash.
For 1997, we expect, on average, economic growth to be moderate, while inflation will remain at a relatively low level. This outlook is not only justified by the most recent cyclical indicators but also by the structural trends in the world economy such as the upgrading and reappraisal of the role of market mechanisms by governments, the role of new technologies in economic expansion and the increasing division of the world in economic blocs with ever closer financial and economic interlinking both within and between these blocs. A period of low inflation means that there will be no strong upward pressure on capital market interest rates in the various regions. This scenario gives a relatively favourable outlook for equity over bonds and cash.
The positive outlook for equity in-vestments is underpinned by the rapid recovery in prices following periods of unrest during 1996 (in particular in July) and was stimulated partly by a fall in interest rates. Earnings outlooks for 1997 are favourable, not only from a cyclical point of view but also from a structural point of view, meaning ongoing restructurings and deregulations.
After years in which especially American equities benefited from this, we think that in 1997, European equities will be the main beneficiaries from this process. More so, we expect an ongoing flow of funds into equities due to changes in savings and investment patterns mainly because of aging and cuts in social welfare. This indicates that market sentiment is still fav-ourable to shares. Although the share valuation criteria may seem somewhat on the high side, this is warranted because of the reasons mentioned above. For the investor who wants to invest in indirect property we also advise to be overweight. The situation on the property markets generally continues to improve. Apart from the favourable economic conditions we see that property shares are benefiting from increasing interest by investors as well as from a shift direct to indirect property investments. However, we should be aware that there are substantial deviations between the various geographical markets and sectors.
Our bullishness on equity and indirect property does not mean that we exclude some temporary volatility based on a nervous market sentiment. However, we think that the fundamentals remain healthy.
Bonds are expected to have a higher expected return than cash although the difference for the US-investor is fairly small. Overall, we think that, on average, current nominal interest rate levels are low (unlike real interest rates) which means that we might see a tendency for slightly rising rates during the year. The steep yield curve in some of the European ERM core countries means that there is still value left. Under the current circumstances cash remains unattractive from an expected return point of view. Also from a risk point of view we do not think it is necessary to include cash in the asset allocation.
Edward Moolenburgh is at ABN AMRO in Amsterdam
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