Joost van Leenders, senior investment strategist at Dutch wealth manager Van Lanschot Kempen, discusses the firm’s latest asset allocation, notably the shift towards equities.

The upturn in equity prices over the past few months has caused Van Lanschot Kempen to increase its equity allocation, creating an equity overweight, notably in European equities due to reasonable valuations.

The economy is picking up slightly, the European Central Bank (ECB) is cutting interest rates and earnings forecasts are displaying an upward trend, the firm said in a note. Green shoots have been visible in the European economy for some time now. The continent is gradually recovering from the negative shocks of the coronavirus pandemic and the war in Ukraine and associated inflation and energy shocks.

With inflation coming down, Joost van Leenders said the ECB now has room to cut interest rates. “Low growth and downward inflation could make it hard for companies to maintain margins at the same level and increase their earnings, but earnings expectations for European equities are moderate at about 4 per cent for 2024. The improved economic outlook is causing earnings expectations to be adjusted upwards, which could further boost equity prices,” van Leenders added.

Frédérique Carrier, head of investment strategy in the British Isles at RBC Wealth Management, also takes a positive stance in European equities in 2024, and has recently upgraded European equities to market weight from underweight in her portfolios. See more commentary here. 

The upward drift in equities has also resulted in a small overweight in Van Lanschot Kempen’s US equities. The slowing US economy, higher earnings expectations and higher valuations pose risks, but van Leenders has decided to retain his positioning. For the time being, most signs are pointing to a soft landing. It’s possible that earnings won’t meet expectations but, as long as they continue to grow, he doesn’t anticipate a long-term downturn in US equity prices. “Although US equities are expensive, the optimism surrounding artificial intelligence has the potential to drive valuations higher,” he said.

Van Leenders holds a neutral position in Pacific and emerging markets. In Pacific, he recently took profit on an overweight in Japan and harbours doubts about Hong Kong. He 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. HSBC Global Private Banking also stays neutral on Hong Kong and mainland China equities, but is optimistic about Asian investment opportunities in 2024, holding an overweight position on equities in Japan, India, and South Korea. See more commentary here. 

European equities at expense of US IG Credit
Van Leenders is financing the acquisition of European equities by selling US investment grade credits. In doing so he is increasing his underweight in the latter asset class. “For some time now, we’ve found spreads too tight for the additional risk versus government bonds. Spreads only need to widen slightly for the asset class to underperform versus government bonds,” he said.

Government bonds
Within US investment grade bonds, van Leenders prefers government bonds. He holds an overweight in US government bonds, but this is mainly due to the underweight in US investment grade credits. Bond yields also declined in the UK, albeit to a limited extent.

When it comes to global investment grade government bonds, he prefers the eurozone. He thinks that there is a bigger chance of yields coming down there and spreads on investment grade credits aren’t as tight as they are in the US. Van Leenders is more cautious about high yield credits as these companies are more aggressively financed and therefore more affected by higher interest rates. “Emerging market debt generates an attractive return but the strong US dollar and turbulence this is causing on the currency markets in emerging markets show that there are risks. This is the reason for our neutral position,” he added.

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.