Patrick Moonen at ING Investment Management still positive on equities

Patrick Moonen, senior equity strategist at ING Investment Management, sees a weakening of appetite for global risk, but remains positive on equities.

Looking forward we remain positive on equity markets. Despite some evidence of somewhat weaker economic data, the moderate uptrend remains in place. Of course, regional differences exist with the US and Japan showing better data than Europe.

The housing recovery in the US and the improved outlook for corporate investment plans are both supportive with the average age of the US machinery park increasing to the highest level in 30 years. This reflects past underinvestment as companies were in capital preservation mood and focused more on debt reduction than on investment or expansion. The return of growth pushed up capacity utilisation and, in the past, this has always been a precursor of higher investments. Meanwhile, in Japan, “Abenomics”, a combination of fiscal spending and loose monetary policy will spur growth.

Another key element in our outlook is valuations. Absolute valuation metrics may be close to normal but, relative to other asset classes, they are still very attractive. The European equity risk premium increased in the aftermath of the Italian elections and the Cypriot bail out and is currently 6,7%, more than one third above its long term average. Meanwhile, the dividend yield compares favourably to the corporate bond yield.

Another driver for equity markets is the recent rise in corporate activity; especially M&A and equity buy backs. We expect this trend to continue as all the necessary conditions are in place. Corporate balance sheets are strong, interest rates are low and companies can easily tap the high yield market to finance the deals.

Next to this financial rationale, there is also a business rationale. In a low nominal growth environment, companies need to search for external sources of growth. Likewise, the high corporate margins leave not much scope for further autonomous operational improvement. Balance sheet restructuring is a way to achieve higher returns by lowering the cost of capital.

Looking at sector allocation, we have cut our commodity exposure by moving Materials and Energy to a small underweight. Overall, we maintain a small cyclical overweight. Meanwhile, in March, we upgraded Health Care to a small overweight as the underlying fundamentals improved and the sector was cheap on prospective earnings.

 

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