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investment outlook
update
September 2013
Advisory and
Discretionary
monthly newsletter
Calm returns to financial markets against the backdrop of improved
growth
Central bankers restored calm to the financial markets relatively quickly by reassuring investors that the stimulus policy will not be abruptly terminated and that any exit will depend strongly on the actual state of the
economy. The economy already started to improve in the second quarter, as evidenced by recent data, including from Europe.
Market environment and Special> pages 2 and 4
Equities back in favour, with emphasis on Europe
We decided to increase equities to strongly overweight, the same position we held in early June before
unrest in the equity markets compelled us to lower the weighting. We also upped Europe to a neutral weighting and reduced emerging markets to neutral.
Outlook> page 5
Government bonds remain sharply underweight
The main surge in US government bond yields seems to be behind us. Nevertheless, we have maintained the
strongly underweight position in government bonds, with a pronounced emphasis on Italy and Spain as these
bonds still offer price potential. We are continuing our search for additional return in various types of corporate
bonds.
Outlook> page 5
market environment
Representatives of the world’s leading central banks
have managed to restore calm to the financial markets.
At the same time, signs that the global economy is
on the eve of recovery are growing. This applies both
to the United States and Japan, and even to Europe
though the recovery there will be slightly later and less
robust (for Europe, see the Special on page 4). In many
emerging countries, growth is decelerating slightly, but
these economies are still powering well ahead of the
rest of the world.
quarter disappointed the financial markets, it was double the
growth in Europe (see Special on page 4) and higher than the
US figure for the same quarter. Meanwhile, the economies
of many emerging countries are undergoing a slight growth
deceleration. This is partly because falling prices are hitting
commodity-exporting countries (such as Russia and Brazil).
Another cause is the diversion of capital flows from emerging
countries to the United States in anticipation of the tapering
of its stimulus policy. Moreover, quite a few emerging countries have raised their interest rates to protect their domestic
currency.
Tapering is in the offing
The recent unrest in the financial markets was triggered
by comments from US Federal Reserve Chairman Ben
Bernanke, who referred to a gradual tapering of the extremely
strong stimulus measures. After the US central bankers – as
well as their colleagues from other leading central banks –
had explained that this would be conditional on an improving
economy, calm soon returned. What’s more, tapering (the
gradual reduction of the bond-buying programmes) is not
the same as the actual tightening of monetary policy (raising interest rates). We do not foresee the latter until 2015.
Incidentally, we expect the FOMC to indicate in September
(or in December at the latest) when the tapering will start
The mood among purchasing managers
and at what pace. Now that the markets are prepared for
this event, we do not expect the issue to spark any further
major price shocks. The central banks in the eurozone and
Index: 50 = boom-bust level
65
the United Kingdom have also adjusted their communication
60
strategy by providing guidance on how long and under what
conditions their policy will retain its stimulating character.
Growth accelerates in the US and Japan; remains high in
emerging countries
The improvement of the global economy is genuinely starting to take shape, most visibly in the United States where
optimism among purchasing managers in both the manufacturing and services sectors suddenly jumped in July. The
manufacturing optimism index advanced from 50.9 in June to
55.4 in July, while the services optimism index climbed from
52.2 to 56, well above the boom-bust mark of 50. In addition,
the recovery in the labour market appears to be holding firm,
thus giving the economy a broader base thanks to the rising
55
50
45
China
Eurozone
United States
40
35
30
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Datastream
The mood among purchasing managers has further improved in the
United States and Europe, with the index in Europe rising back above
the boom-bust mark of 50. The sentiment in China remains somewhat
subdued, though the Chinese economy is still growing at a much
faster pace than the economies in the other two regions.
number of income earners. The Japanese economy is also
forging ahead. Though the growth rate of 0.6% in the second
page 2
market developments
The financial markets are beginning to position themselves for the inevitable: the tapering of the extremely
expansionary central bank policies. This is starting in
the United States, but other countries are also feeling
the effects. Bond yields are rising around the world.
Normally, this could be expected to put some pressure
on equity prices, but the positive impulse from the
accelerating economic growth and improving profit
outlook will comfortably offset this. However, we are
seeing a certain rotation towards equities and sectors
that are better positioned to benefit from recovering
economic growth.
US stock markets have advanced by half that percentage,
while most European stock exchanges have posted gains of
between 8% and 13%. The emerging markets are still about
3% in negative territory. So the conclusion could be that
Europe and the emerging markets have recouped some of
the losses sustained in the first half of the year. Moreover,
the recent market reaction was effectively a rebound from
the downward market correction triggered in May and June
by discussions about the tapering of the expansionary monetary policy. Since then, the equity markets have once again
set their sights on the medium term, partly thanks to the
favourable macro-economic developments, which particularly
favour businesses and sectors that are set to benefit from
Relatively sharp rise in bond yields
the recovery of economic growth.
The imminent prospect of a reversal of the central banks’
stimulus policies and the expected withdrawal of a dominant
buyer from the bond market have already sent bond yields
sharply higher. In the United States, but also in Germany,
the 10-year government bond yield rose by 0.25% between
mid-July and mid-August, bringing the year-to-date increase
to a full percentage point in the US and half a percentage
point in Germany. In Italy and Spain, interest rates have fallen
this year by 0.3% and 0.8%, respectively. This implies a yield
compression versus the former safe havens. Given the incre-
10-year government bond yields
ase in bond yields in the United States and Germany, the
reduction of the US bond buying programme now appears
to have been largely factored into the prices. In our opinion, a
8
further yield rise cannot be excluded, but will be limited. The
7
situation in the European periphery markets may be less tran-
6
quil. The imbalances and risks have not entirely disappeared
5
and may, from time to time, spark violent price and interest
4
rate volatility.
3
%
Spain
Italy
Germany
United States
2
Equity markets driven by signs of economic recovery
The equity markets showed a very diverse picture between
mid-July and mid-August. The price increases remained very
limited in the United States (0.5% for the S&P-500), but were
much stronger in most European equity markets (ranging
from 3% in Germany to almost 7% in France). In Japan, the
Nikkei actually fell by almost 4% on balance. The emerging
markets, by contrast, achieved a moderate increase of 3%
on average. However, when looking at the equity price
1
0
2010 Apr Jur Oct 2011 Apr Jul Oct 2012 Apr Jul Oct 2013 Apr Jul
Source: Datastream
Since July 2012, a strong yield convergence has occurred between
the United States and Germany on the one hand, and Italy and
Spain on the other. This was initially due to a decline in Italy and
Spain, but more recently also to an increase in the two other
countries.
movements since the start of this year, an entirely different
picture emerges. The Japanese Nikkei is 35% higher, the
page 3
special
Europe out of recession, but major differences remain
had its strongest negative effect and will decrease in terms of
In the second quarter of this year, the eurozone economy grew
both size and impact in the coming years. This development,
by 0.3% compared to the first quarter but economic activity
too, will support these economies. The return to growth in
was still 0.7% lower than in the second quarter of 2012.
Germany and France also opens up prospects for the other
Nevertheless, a gradual improvement is visible as the compa-
eurozone countries as their export opportunities improve.
rable figure in the fourth quarter of 2012 and the first quarter
The same applies to the Netherlands, which is plagued by
of this year was around -1%. The major differences within the
structural problems in the form of falling house prices and
eurozone remain a source of concern. Germany and France
relatively high mortgage debts. These issues have severely
are doing relatively well. Meanwhile, Italy, Spain and the
dented consumer confidence. Still, thanks to its strong
Netherlands are lagging behind, while Portugal is on the mend.
position as a supplier of the German automotive and capital
The recent developments and outlook are sketched below.
goods industries, the Netherlands is even better placed than
others to benefit from a resurgent Germany.
Consumer growth varies strongly from country to country
Relatively strong private consumption growth was an important reason behind the robust performance of Germany and
France compared to other major eurozone countries in the
second quarter with growth of 0.7% and 0.5%, respectively.
In the past three quarters they also clearly outperformed
most of the other European countries. Consumption stagnated in Italy, Spain and the Netherlands, whose economies
continued to contract in the second quarter. The pace of
contraction is slowing, but these economies shrank in the
last three quarters as a whole. Portugal was a favourable
exception, enjoying growth of no less than 1.1% in the
Economic growth over the past three quarters
second quarter. However, due to the preceding extremely
severe contraction, particularly in the last quarter of 2012, this
% versus last quarter
country’s economy still shrank in the last three quarters as
1,5
a whole. Greece has not yet presented any Gross Domestic
1,0
Product data, but is presumably also still in recession. Most
0,5
East European countries as well as Finland – which have
been omitted from the graph for the sake of clarity – saw
growth recover in the first two quarters of this year. All in all,
0,0
-0,5
therefore, striking differences exist within the eurozone, sig-
-1,0
nalling that balanced development within the region remains
-1,5
a distant prospect.
-2,0
Germany and France must take the lead
Even so, the outlook for the European economy is starting to
brighten. In many South European countries this is reflected
in the reduction of the balance-of-payments deficits, thanks
not only to lower imports but also to a limited increase in
exports. The latter points to a slight improvement in their
2013 II
2013 I
2012 IV
Germany
France
Italy
Spain
Netherlands Portugal
Source: Eurostat
Eurozone growth averaged 0.3% in the second quarter, but there
were strong differences between the member states. Germany and
France were the star performers among the large countries, and
Portugal recovered strongly from a deep recession. The contraction
slowed further in Italy, Spain and the Netherlands.
competitiveness, which is a key condition for kick-starting
economic growth. At the same time, fiscal consolidation has
page 4
outlook
Equities strongly overweight once again
government bonds whose prices may rice slightly further.
In early June, we decided to lower the strongly overweight
In addition, we are maintaining the existing (overweight)
position in equities. There were fears of growing price
exposure to corporate bonds, including both investment
volatility due to uncertainties resulting from the tapering
grade companies and high-yield companies (offering higher
of the stimulus policy of the US Federal Reserve System
returns, but also posing a higher risk) and bonds of emerging
(Fed). This unrest did indeed materialise, causing sharp falls
countries.
in the international equity markets. Reassuring statements
from central bankers helped quickly restore calm. This,
Hedge funds, commodities and real estate
alongside the improving economic outlook, prompted us
We remain overweight in hedge funds in the more defensive
to raise the equity position again to strongly overweight.
profiles, as these offer a good alternative to bonds. In the
As the economic outlook is also brightening for Europe, we
more offensive profiles we remain underweight in hedge
simultaneously switched this region’s underweight position
funds in order to benefit from the better outlook for equities.
to neutral. This was done at the expense of the overweight
In the more neutral profiles, we maintain a neutral stance
exposure to emerging countries (now also neutral) where
towards hedge funds. We maintain a cautious approach to
the growth outlook – though still positive – is deteriorating
commodities (neutral weighting), mainly because many com-
somewhat. Commodity-exporting countries (such as Russia
modities are contending with substantial excess production
and Brazil) are facing a decline in revenues due to falling
capacity. In addition, a higher dollar (which we expect) and
prices. Other countries have raised their interest rates to
higher interest rates are disadvantageous to commodities.
protect their domestic currency and many of the emer-
Real estate is sensitive to expected and actual interest rate
ging countries are in a transitional phase towards a more
increases, despite the positive effect of a reviving economy
consumption-driven economy with slightly lower growth
on the fundamentals of property and the cash flows. We
figures.
therefore maintain our neutral stance.
No changes in bond allocation
Bond yields have generally increased further since the last
investment committee meeting on 17 July. This was partly
related to the expectation that the bond-buying programmes of central banks (and particularly the Fed) would soon
be reversed. On the other hand, it also stemmed from an
improvement in the economic outlook. Though we expect
the rise in interest rates to remain limited through year-end,
we are maintaining our strongly underweight position in
government bonds, with an emphasis on Spanish and Italian
page 5
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