Joost van Leenders, senior investment strategist at Dutch wealth manager Van Lanschot Kempen shares his insights on the outlook for asset allocation in 2024, after the extreme market turbulence and equity sell-off.

Despite financial markets being affected by recession fears, sparking declining bond yields, downward equity markets and wider spreads on credits, Joost van Leenders at Van Lanschot Kempen is not going to change the firm’s investment policy and retains his overweight position in equities.

Although Van Leenders noted the risk of a slowdown in growth, he does not believe that a single weaker job market report in the US necessarily points to a recession. “Job growth was weak in the US in April, and this was followed by better data. We’re seeing less weakness in the US service sector and European consumers are being given slightly more breathing space thanks to the lower inflation. We also view corporate earnings as a boost for equities,” he said in a note.

After the annual inflation rate in the US fell to 2.9 per cent in July, below economists expectations of 3 per cent, Nicolas Sopel, head of macro research at Quintet Private Bank (parent of Brown Shipley), also thinks the recession risks are overblown. See more commentary here.

Van Leenders also highlighted how there was little capacity for bond yields to come down, especially at the long end of the curve last month. Long-term yields had already priced in lower inflation and cuts to interest rates by central banks. In this respect, he thinks the substantial downturn in yields in July, and especially at the start of August, could be an overreaction.

Markets are now pricing in four cuts to interest rates in the US before the end of the year. As there are only three policy meetings left this year, this would mean that the US Federal Reserve would need to cut rates by 50 basis points at least once. He thinks this is unlikely. He holds an underweight position in bonds. US investment grade credits are particularly unattractive, in his opinion, because he believes that the tight spreads offer insufficient reward for the higher risk versus government bonds. Spreads only need to widen slightly for the asset class to underperform versus government bonds.

Within US investment grade bonds, Van Leenders prefers government bonds. However, when it comes to global investment grade government bonds, he prefers the eurozone. Yields there have dropped by slightly less than in the US and spreads on investment grade credits are not as tight as they are in the US.

He is cautious about high yield credits as these companies are more aggressively financed and therefore affected more by higher interest rates that gradually work their way into interest charges when credits are refinanced. “Emerging market debt generates an attractive return, but this is mostly to be found in the weaker countries and little risk premium has so far been priced in for the turbulence surrounding the US elections in November and any further slowdown in growth,” he continued. This is the reason for his neutral position.

For real estate, Van Leenders views the uncertainty surrounding interest rates and potential downgrades to property valuations as too high to build a position in this asset class. As for commodities, his doubts mainly relate to the robustness of the Chinese economy.

Equities
Van Leenders said that the biggest losses in August were in Japan, where the yen appreciated after the central bank raised interest rates. The US, eurozone and emerging markets all noted similar losses to each other. The UK was the exception, thanks to the defensive nature of the FTSE100 index. “The outlook for the economic cycle remains crucial for equities,” he added.

As long as the US economy continues on the path towards a soft landing and earnings continue to grow, Van Leenders doesn’t think that US equities will enter into a long-term downward trend. “Expected earnings per share for the coming 12 months are also being adjusted upwards in both the US and Europe, which could boost equity prices. The corporate results reported over the second quarter are sound in the US and slightly improved in Europe,” he continued. Van Leenders holds a neutral position in Pacific and emerging markets. In Pacific, he recently took profit on an overweight position in Japan and harbours doubts about Hong Kong. Van Leenders doesn’t consider the growth, momentum and revisions to earnings in emerging markets to be robust enough for him to hold an overweight in these.