Investment Outlook

Investment Outlook: Autumn 2013



As described in our Summer Outlook in the beginning of July, the turmoil in financial markets created by comments about monetary policy on May 22nd by Ben Bernanke of the US Federal Reserve set the tone for financial assets during the third quarter. The word “tapering” became a household financial term and we have had a sideways market during the summer with a couple of new highs. Then, on September 18th, the Federal Reserve announced to the surprise of most market participants that for the time being, reducing the $85bln monthly purchases of bonds was not going to happen. Markets reacted positively with the S&P 500 reaching a new intra-day high of 1729.44 and rising prices for gold and US treasury bonds. Realizing that it will be just a question of time before the US Federal Reserve will move to a less easy monetary policy, the US stock market declined and ended the third quarter under the levels of May 22nd.

There was less focus over the summer on the European crisis, but the recent political developments in Italy are worrisome and Greece will soon need additional financial support. Portuguese interest rates have been rising again to overextended levels. The re-election of Angela Merkel in Germany was positive although the creation of a new coalition will not be easy.

Recent geopolitical moves with respect to Syria and Iran look positive. It remains to be seen if the talks will lead to real actions, but there seems to be decent progress.

Domestic politics in the US are gridlocked again and the partial government shutdown is certainly not helpful. More serious will be the talks about the debt ceiling before the deadline of October 17th, potentially leading to an unprecedented US default on its debt. Although Moody’s made clear that they are looking beyond these short term problems and are not inclined to change the credit rating of the US, market participants are nervous. With good equity gains since the beginning of the year (S&P 500 ytd +14%), some further profit taking wouldn’t be surprising.

Japan is on the right track after the election of Abe in November 2012. Lower exchange rate and huge monetary stimulus are lifting the country out of the deflation trap. The announced sales tax increase to 8% next spring will be mitigated by further fiscal stimulus. Corporate capital spending and optimism are accelerating.

Although economic growth in China is not double digit anymore, a hard landing seems unlikely and the latest economic figures are reassuring. Inflation is kept in check. The stock market improved 9.9% during the third quarter and the Chinese currency stayed strong. This was different for some emerging markets, especially the ones with fiscal or current account deficits. Since May 22nd, currencies such as the Indian Rupee, Indonesian Rupiah and the Brazilian Real came under a lot of pressure. As a result the Euro has strengthened against all currencies.

In conclusion the world economy is growing below trend with 2-3% and potential growth is higher. Consequently corporate earnings are expected to grow moderately. Inflation will continue to be subdued.

Over the medium term, major central bank monetary policy remains accommodating with very low short term interest rates. The increased difference between short term and long term interest rates has stopped. Volatility is increasing because of the ongoing concentration of capital in fewer hands.


The current asset allocation is being maintained with overweight positions in equities and cash and underweight positions in bonds and commodities. The reduction in the average bond duration, which took place earlier this year, is being kept at present levels, while movements have been made into lower rated corporate bonds. Although the currency diversification contributed negatively to year to date performance, the strategy has not been altered. 

9 October 2013                                                                                                                                                   LAAKEN ASSET MANAGEMENT N.V. © 2013