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Van Lanschot Kempen Favours Japanese Over US, European Equities In 2024

Amanda Cheesley

16 April 2024

After a hesitant start to the year, equity markets are finding their way upwards again. This generated small gains in the US and Europe, while Japan enjoyed an extremely good month, Joost van Leenders at said.

“Emerging market equities in fact lost ground. It was calm on the bond markets as well. After two months of downturns, bond yields rose again slightly in January,” van Leenders said in a note. “The positive sentiment was also visible in spreads on corporate bonds and bonds issued by peripheral eurozone countries as spreads on the vast majority of these tightened somewhat,” he added. “Higher oil prices and lower prices for metals and gold meant that commodities remained more or less unchanged. Real estate was forced to relinquish a large portion of the significant gains it had earned in November and December.” 

The upward trend on the equity market caused the equity weight in the firm’s portfolios to increase and approach a neutral level, given the growing probability of a soft landing in the US, the prospect of central banks cutting interest rates, and relatively robust earnings' growth in Japan.

Although the eurozone economy is still refusing to grow, van Leenders believes there are some green shoots in the European growth landscape. “In China, the economy is still struggling,” he added. “Stimuli are being announced but they’re not entirely convincing. For instance, the central bank lowered the reserve requirements for commercial banks to give them greater flexibility for lending larger amounts of money. Yet given previous liquidity injections into the financial system, this will have little additional impact.”

Investment policy: equities to neutral
The firm said its investment policy has contained an equity underweight for some time, due to concern over the impact of sharp monetary tightening on economies and the positive earnings' forecasts and, especially in the US, high valuations. These concerns haven’t entirely dissipated but the firm said it is seeing resilience from the US economy. The positive trend on equity markets has caused the firm's equity underweight position to shrink and approach a neutral weight. The firm has consequently increased its equity allocation from an underweight to neutral position and has expanded its overweight position in Japan. “Monetary policy continues to be extremely expansionary in Japan. Corporate earnings' growth has recently been stronger there than in the US and Europe. Moreover, if economic or market trends are worse than expected, the appreciating Japanese yen could offer some protection in the form of a safe haven,” van Leenders said.

“We don’t think this is a good time to increase our allocation to US equities due to the exceedingly positive sentiment on the US equity markets. In Europe, we’re still very concerned about corporate earnings. In addition to the overweight in the Pacific region, we hold a small underweight in the US, a slightly larger underweight in Europe and a neutral position in emerging markets,” he added. He is not alone in his views. Equities remain Swiss private bank Union Bancaire Privée’s core holdings with preferences for technology and Japan. “In 2024, Japan is offering premium, secular earnings' growth over European and emerging market equities,” Michaël Lok, group CIO and co-CEO asset management at UBP, said. See more commentary here.

Government bonds – overweight
“January’s downturn in US 2-year bond yields formed an exception as otherwise yields climbed. In the UK by a fairly large amount at the short and long end of the curve, in Germany and the US mainly at the long end of the yield curve,” van Leenders said. He thinks yields could come down further owing to the moderate growth in Europe and declining momentum in the US as well as lower inflation. “There’s little potential for yields to fall in the short term. The US economy is proving to be resilient, while interest rate cuts will arrive slightly later than expected and a large number have already been priced in. If interest rates remain stable in the short term, US government bonds will profit from the higher rates. Within our overweight positioning, we therefore hold an overweight in the US and an underweight in the eurozone,” he added.

Meanwhile, the firm is underweight in investment grade credits, seeing them as less attractive than government bonds. “Within investment grade credits, we now have a relative preference for the eurozone versus the US,” he said. “Like investment grade credits, high yield credits have lost some of their relative attractiveness versus government bonds thanks to the higher yields in the latter asset class.” The firm is underweight in high yield credit and neutral in emerging market debt. The firm’s neutral position on emerging market debt listed in US dollars is a trade-off between the attractive interest compensation, relatively wide spreads versus other asset classes and lower inflation in the US on the one hand, and the slowdown in global economic growth that it anticipates and the Chinese economy’s inability to accelerate on the other hand.

“The risk of a recession in the US has nevertheless receded in the short term. Bonds listed in local currency could profit from declining inflation and cuts to interest rates in emerging markets. However, the interest compensation is relatively low versus developed countries and this reduces the relative attractiveness,” van Leenders said.

Commodities
The firm also has a neutral position in listed real estate and commodities. “From a cyclical perspective, we don’t view this as a good time to build up a position in commodities. Stalling growth in global industry and China mean the outlook isn’t positive. The limited fiscal stimuli in China, which are leading to moderate growth in investment in infrastructure and homes, is restricting the potential for higher prices in metals,” van Leenders said.

“The OPEC countries and Russia are limiting supplies, but this is partly being offset by higher production in non-OPEC countries, especially the US. As a result, the oil market has plentiful supplies,” he continued. “The more expensive gold price is primarily the result of expansionary monetary policies and the large amount of liquidity this has created, as well as gold purchases by central banks. Gold is an interesting investment at times of uncertainty, but given its high price a large amount of uncertainty and/or lower interest rates have already been priced in.”