ABN AMRO Private Bank Takes Profits On US, Cyclical Stocks; Remains Bullish On Equities Generally

Tom Burroughes

12 December 2013

ABN AMRO Private Banking has sold some of its positions in US equities and cyclical stocks, while taking a bullish stance towards European equities and high-quality bonds, the Netherland-based firm has said in a note.

Explaining its latest asset allocation stance, the private bank has moved to an underweight stance on US equities, and has cut its exposure to cyclical stocks after a period of recent strong market gains in these areas. The firm recommends further portfolio diversification to cut risks.

In its Q1 2014 Investment Outlook, entitled, “The Great Rebalancing”, ABN AMRO Private Banking remains overweight equities in general and has recently upgraded European equities to overweight (from a neutral stance), on valuation grounds relative to other markets and against historical averages. High-dividend stocks are again in focus, as are companies under pressure to increase shareholder value via share buybacks or corporate restructuring.

Although the bank forecasts global economic growth of 3.7 per cent in 2014, it says central banks will wait to see firm evidence of broad based economic recovery before tightening monetary policy due to continuing concerns around deflation – recently demonstrated in the European Central Bank rate cut.

“The global economy continues to gain strength and historically low interest rates are being prolonged by muted inflation. This results in a sweet spot for equities and quality bonds. Conditions support portfolio diversification to reduce risk, based on low market volatility and declining correlations between asset classes,” Didier Duret, chief investment officer at ABN AMRO Private Banking, said.

Model

Asset allocations in the firm’s balanced model portfolio remain unaltered from the last quarter, with equities at 44 per cent, bonds 37 per cent and cash 9 per cent. Hedge funds, property and commodities retain weightings of 5 per cent, 3 per cent and 2 per cent respectively.

Alongside its downgrading of cyclical industrials stocks, the private bank has upgraded consumer staples and telecoms to neutral (from underweight). It remains overweight in oil services, exploration and production, chemicals, capital goods, automobiles and components, pharmaceuticals, biotech and life sciences, insurance, software and services and semiconductors and equipment.

The equity theme of the quarter, ABN AMRO said, is “unlocking value” and companies that are under pressure to increase shareholder value, either via share buybacks or corporate restructuring. These include Amgen, Apple, Dow Chemical, SBM Offshore, Gilead, Microsoft, Nestlé and Novartis.

Fixed income

The firm remains underweight fixed income, but recommends high quality corporate credits. It believes Spanish and Irish sovereign bonds could be income drivers for portfolios in the year ahead.

In currencies, the dollar, sterling and Swedish krona are favoured, alongside the Chinese yuan, Korean won, Mexican peso, Chilean peso and Polish zloty.

The bank maintains a bearish short term view on commodities, but recommends long/short equity and event-driven hedge funds.