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Kempen Insight /// November 2015
OUTLOOK
2016
DOES RISK
STILL PAY?
DEMOGRAPHIC
DIVIDEND or
DEMOGRAPHIC
BURDEN
The two sides
of Keynes
Table of contents
Tempered
­expectations
/// Prognoses for economic
growth and inflation
10
The two
sides of
Keynes
4
/// Lessons for
­policy­makers and
­investors
Towards
growth
16
The four horsemen
of the apocalypse
/// Alternative scenarios
/// Economic recovery
remains fragile
14
6
2
Kempen Insight, November 2015
‘Once more’
/// The making of The macro movie
Outlook 2016
‘Investing means dealing with insecurities, with risks.
These risks are in the future, not in the past. That is
why it is so important to look ahead, in a disciplined
manner, using scenarios.’ These words were recorded
in a video clip that we made for the Outlook 2016
seminar. Together, we look ahead to the coming years
and the main macroeconomic developments that will
influence your investment policy as well as our own.
What will the year 2016 bring? We find ourselves in an
environment of low forecast returns on virtually all
investment categories by now. This leads us to the
question as to whether investors are still sufficiently
rewarded for the risks they take, especially in this world
of low growth and low inflation. One is inclined to
wonder whether all that policymakers around the
globe can do is argue about re-dividing the pie or
whether they have the tools to ensure that we have a
Books that inspire
/// Evert Waterlander’s selection
bigger pie. Perhaps we can learn a lesson or two from
14
one of the most successful economists and investors,
John Maynard Keynes.
In addition to insight into matters such as strategic
asset allocation, we will give you a
Does risk still pay?
/// Investment categories in 2016
glimpse of the books we have read
18
and we will discuss alternative
scenarios.
I would like to hear your opinion and
look forward to your reactions,
which you can send to the
Column by Roelof Salomons
/// Which scenario will unfold when it comes
to the economic cycle?
address mentioned below.
21
Lars Dijkstra
Chief I­nvestment Officer
[email protected]
This publication is offered to you by Kempen’s Asset Allocation Team.
/// COLOPHON
November 2015
©Kempen
Address
Kempen Fiduciary Management
60 Cannon Street
London, EC4N 6NP
United Kingdom
Images
Cover: Jeroen Hofman
Bram Belloni, Mario Hooglander
Design
Henrike Beukema
Editors
Ruth van de Belt
Parisa Veldman
Anja Corbijn van Willenswaard
Kempen Fiduciary Management is a trading name of
the UK branch of Kempen Capital Management N.V.,
which is registered in the United Kingdom (BR017904)
at 60 Cannon Street, London EC4N 6NP and which is
a limited liability company incorporated in the
Netherlands, authorised by the Dutch Authority for
Financial Markets (AFM) and subject to limited
regulation by the UK Financial Conduct Authority
(FCA). Details about the extent of our regulation by
the FCA are available from us on request. This
information should not be construed as an offer and
does not provide sufficient basis for an investment
decision.
An interactive edition of
Kempen Insight is
available online at
www.kempeninsight.nl/en
/// by
Lars
Dijkstra
photo
tekst
Lars
Dijkstra
fotoGETTY
xxx IMAGES
Keynes...
In the 1930s, John Maynard
Keynes, the father of modern
macro-economics, announced
that governments should pursue an anti-cyclical budgetary
policy. During an economic
crisis, governments need to
spend money to stimulate the
economy. In times of ­economic
prosperity, governments need
to cut back in order to avoid
government finances getting
out of hand.
Keynes...
“Successful
investing
is anticipating
the anticipations
of others”
-John Maynard Keynes
4
Kempen Insight, November 2015
Keynes also believed in acting
contrarily as an investor.
He preferred equities that
no-one else wanted and
­ignored ­popular equities.
In fact, if Keynes noticed that
many investors were coming
up with the same ideas, he
decided it was time to adjust
his opinion as he viewed herd
behaviour as one of the
­greatest pitfalls for investors.
the economist
Many governments, particularly European
to recover. However, the European debt
ones, have apparently forgotten this advice
crisis prompted governments to introduce
over the past few years. Since the Great
austerity measures. Throughout Europe
Recession started, many analysts have
governments curbed spending and rational-
pointed out that a large number of Western
ised drastically in order to get their budget
countries now find themselves in a balance
deficits below the three percent ceiling laid
sheet recession. Private individuals needed to
down in the stability and growth pact. This
pay off their high net debts, but low growth
was the wrong move. The balance sheet
and low inflation meant that it was difficult
recession was not yet over and the drop in
to grow out of the debts. Deleveraging or
government spending plunged Europe into
MONETAry
restructuring was required. The private
a new recession. We only need to look at the
policy
sector kept a tight hand on the purse strings
US to see how things could have turned out
and a large spending gap arose.
differently. The US government continued to
Fiscal
During a balance sheet recession it is essential
pump money into the economy for a consi-
policy
for policy makers to bridge this gap by
derable length of time, giving the private
providing budgetary and monetairy stimula-
sector time to restore its balance sheets. This
Financial
tion. Otherwise, the recession becomes
difference in government policy is one of the
regulation
deeper and longer. This is precisely what
main reasons behind the difference in
happened in Europe. Governments initially
growth between the two regions over the
increased spending, allowing the economies
past few years.
Effectivity of
Government
Policy
USEurope
Source: Kempen
the investor
According to Keynes, one of the basic
through. And you can only do that with
­principles for a successful investment
a small number. He was what we would
strategy is the careful selection of a
today call a committed long-term share-
restricted number of cheap investments.
holder. A truly bottom-up stockpicker. In his
Just like Benjamin Graham he was a real
investment ­manifesto, Keynes argues in
value investor. Criteria: a low valuation
favour of a balanced portfolio which
compared to the potential Net Asset Value
includes different – and preferably
plus a low valuation compared to potential
opposing – risks. The portfolio needs to
alternative investments.
contain equities from completely different
The fact that Keynes believed in investing in
companies. His investment manifesto also
a restricted number of companies does not
states that investments need to be retained
Kempen goes along with the
mean that he thought diversification a
in reasonably large quantities in good times
latest investment craze as little
waste of time. His preference for a small
and bad, until the valuation has lived up to
as Keynes did. We draw up our
number was chiefly the result of his invest-
its promise or it is clear that the investment
own plan and base our investment
ment philosophy, namely that you need to
was a mistake. In other words: Keynes
decisions for the long term mostly
know the companies in which you invest
believed in concentrated portfolios with a
on valuation.
- and their management - through and
long-term investment horizon. 
Avoid herd
behaviour
Kempen Insight, November 2015
5
6
Kempen Insight, November 2015
/// by RUTH VAN DE BELT photo BRAM BELLONI
steering
towards
growth
Seven years after the advent of the
Great Recession, the economic
­recovery remains fragile in a number
of Western countries. Investment
Strategist Ruth van de Belt explains
why we are at the end of a monetary
super-cycle.
Monetary policy has been used to stabilise the economy
when an external shock occurs since the 1980s. Policy­
makers have succeeded in restricting the economic and
financial harm caused by a recession by easing monetary
policy and triggering a new private debt cycle. This
super-cycle has now come to an end. Although central
banks have again cut the policy interest rates that have
been low since the start of the 2008 financial crisis, we
have hardly seen credit expansion. Even a short-term
interest rate of zero percent has been unable to really
tempt consumers and companies into taking out loans.
Keep saving
We are not dealing with a normal recession, but with a
balance sheet recession. (Housing) bubbles financed using
loans have burst in many countries. This has led to a
decrease in assets held by the private sector, while the level
of debt has remained the same. In other words, net debt
The end of the
monetary super-cycle
has grown. Low growth and low inflation have made it
difficult to grow out of the debts. Deleveraging or restructuring is required to reduce the debt as a percentage of the
gross domestic product (GDP).
The private sector has spent the past few years restoring its
balance sheets and has had no need of credit, not even at
low interest rates. Lenders have also been less than
Kempen Insight, November 2015
7
IMPACT OF QUANTITATIVE EASING ON FINANCIAL MARKETS
YIELD
Normal
MONEY
MOVES TO
RISKIER
ASSETS
LIQUIDITY
PUSHES DOWN
CASH
2
1
Cash
Now
Bonds
Equities
RISK
Source: Kempen, November 2015
generous when it comes to issuing loans as
more attractive in relative terms. Investors
tion of capital. Ailing companies have easily
they have been busy consolidating their
started to exchange their government
been able to roll loans forward in order to
own balance sheets. The low policy interest
bonds for creditworthy credits, which were
survive. Growth remains low and this is har-
rates have therefore not helped boost
in turn exchanged for high yield credits,
ming productivity: a vicious circle. Low
economic growth. The balance sheet
which were in turn exchanged for equities.
interest rates now will lead to low yields in
recovery is not over yet everywhere. US,
Yet the risk involved in these asset classes
the future.
European and Japanese households are still
remains unchanged. Equities are still riskier,
net savers. Some countries are currently
and when the inevitable price correction
Time to act
seeing even higher levels of savings.
occurs - sometime in the next few years -
The end of the monetary super-cycle
the question is whether the risk will be held
means that central banks have fewer and
by those investors who can best absorb
fewer tools at their disposal for stimulating
that specific risk.
the economy if they need to do so.
Unconventional
The ineffectiveness of conventional
monetary policies and the fact that central
Moreover, exchange rates will start to play
banks cannot reduce policy interest rates to
Vicious circle
far below zero were the reason for uncon-
The unconventional policies were not without
Although a deliberate weakening of
ventional policies in the shape of quantita-
consequences. Since the crisis, China and
a country’s currency is parasitic behaviour,
tive easing. Little or no attention was paid
other emerging markets have seen unbridled
policymakers seem increasingly inclined to
to the side-effects of quantitative easing, in
debt accrual. According to the BIS, the Bank
do this. Currency volatility is growing,
fact these were in part viewed as desirable.
for International Settlements, since 2007 the
leading to higher costs for cross-border
Low yields forced investors further up the
average debt burden in emerging markets
goods and capital transactions. There is also
risk curve, and this was aimed at triggering
has risen by 50 percentage points to 167
a risk of countries imposing trade barriers. a welfare effect.
percent of the GDP. In China, this figure has
Central banks have done what was needed
The lower expected returns on the bond
risen as high as 235 percent. Furthermore,
of them to stimulate the economy over the
markets led to other asset classes becoming
the low interest rates are causing a misalloca-
past few years, but the same cannot be said
8
Kempen Insight, November 2015
a more prominent role in monetary policy.
of many governments. Governments in
term and increasing the potential for
In this light, the refugees arriving in Europe
many Western countries initially increased
growth in the long term.
do not pose a problem but in fact an
spending, but a different wind has been
opportunity. Many peripheral countries also
blowing through Europe since 2009. The
Reforms needed
European debt crisis prompted govern-
In addition to budgetary stimulation, it is
Incidentally, Europe is not the only region
ments to introduce austerity measures.
essential that reforms are implemented.
that needs to implement reforms. Invest-
Countries with a budget deficit in excess of
Various measures can be taken to boost the
ment in e.g. infrastructure, education and
3 percent of their GDP were forced to
potential for growth. The further economic
technology is also needed in the US. And
correct this in line with the Stability and
integration of the Eurozone is crucial. As
many emerging markets need to tackle
Growth Pact (SGP). This left no room for
economies and institutes have so far failed
their structural weaknesses. These include
stimulatory budgetary policy, while the
to become better aligned with one another,
issues such as low savings quotas, low
economy was still struggling with a balance
each time a shock occurs somewhere in the
labour productivity, infrastructural
sheet recession. However, cut-backs and
monetary union questions are asked about
­bottlenecks and the quality of education. 
higher taxation made it more difficult for
its durability. Europe also needs to tackle
households to deleverage. Sovereign debt
the problem of an ageing population.
did stabilise, but at the expense of econo-
Many countries have raised the retirement
mic growth.
age over the past few years, but this is not
We believe that European countries with
yet universal. Participation in the job
budgetary capacity ought to use this to
market needs to be increased by focusing
pursue additional budgetary policies.
social security more on activation, making
Germany, the Netherlands, Finland and
the individual job markets more flexible
Austria could opt for full or partial public
and reforming tax systems. Yet less
financing of infrastructural and/or sustaina-
conventional measures could also be
bility projects, fuelling growth in the short
applied, such as encouraging immigration.
need to increase their competitiveness.
Ruth van de Belt
Investment Strategist
[email protected]
Kempen Insight, November 2015
9
Long-term
­scenario
Tempered growth
forecasts
10
Kempen Insight, November 2015
/// by RUTH VAN DE BELT images MARIO HOOGLANDER, HENRIKE BEUKEMA
The forecast mean reversion of valuation
ally used. And actual production determines
ratios is crucial to expected returns in the
real economic growth in the short term.
long term. Changes to expected returns are
This can fluctuate considerably.
potentially a reason to adjust the strategic
allocation. In this article we explain our
Demographic burden
forecasts for economic growth and inflation.
Last year we indicated that potential growth
In doing so, we assume the most likely
would be moderate over the next decade.
scenario. Yet the future is shrouded in
We have not altered our outlook on this.
uncertainty, and this is why we present a
The ageing population means that the
number of stress scenarios in the article ‘The
demographic dividend has turned into
four horseman of the Apocalypse’.
a demographic burden in many Western
Real economic growth depends on supply
countries. An increasingly small portion of
and demand factors. The supply factors
the population is in the productive phase of
determine the size of production capacity,
life. The working populations in Japan and
or the economy’s potential for growth. This
Europe will decrease over the next few
is the maximum growth an economy can
years. The US and the UK will not yet be
sustain in the long term without becoming
confronted with this thanks to migration,
overheated, which would cause inflation to
but these countries are also facing a very
rise. The potential for growth develops very
small increase in the working population.
evenly over time. Demand determines the
Many emerging markets will still be able to
extent to which production capacity is actu-
benefit from the demographic dividend, or
PotentiAL AND REAL GROWTH
PRODUCTION VOLUME
OP
THE CYCLE
OF
BO
CL
E
T
Investment portfolios
regularly require
­adjustment in order to
maintain the required
course in a dynamic
­environment. This is
why Kempen annually
tests its strategic asset
allocation by making
forecasts for real
­economic growth,
inflation and capital
market yields.
TTO
M OF TH
EC
Y
TIME
POTENTIAL GROWTH
REAL GROWTH
Source: Kempen
Kempen Insight, November 2015
11
GROWTH AND INFLATION FORECASTS
1½ 2½%
INF
1½ - 1½ 2½% 2½%
1½ - 1½ 2½% 2½%
½1½%
RPG
United
Kingdom
United
States
1½ 3%
INF
RPG
INF
RPG
Europe
INF
RPG
01%
Japan
3½ 4½%
Emerging
markets
RPG = Real potential growth
1½ 3½%
RPG
INF
RPG
2½ 4½%
INF
3½ 4½%
Asia ex
Japan
INF = Inflation
Source: Kempen, November 2015
Ageing turned the
demographic dividend
into a demographic
burden
at least they will if they can create the
­political and social conditions to take
­advantage of this opportunity.
No temporary
phenomenon
Over the past few decades, between 60%
and 70% of the world’s growth in GDP was
driven by a rise in labour productivity. Over
the next decade, the growth in labour
productivity will continue to be by far the
most important source of economic growth.
Yet the growth in productivity will be lower
than prior to the Great Recession. This is not
just due to cyclical factors. Even if a correction is made for these, a downward trend is
12
Kempen Insight, November 2015
visible. A large portion of the global slow-
Potential growth will be moderate over the
down in productivity growth is due to
coming decade and the same applies to
lower growth in productivity in emerging
inflation. We expect inflation in the US,
markets. And we foresee no change to this.
Europe and the UK to be close to the
The productivity gap between developed
respective central banks’ inflation targets.
and emerging markets is closing, making it
Although the Japanese central bank offi-
increasingly difficult for emerging markets
cially pursues an independent monetary
to copy innovative and new technologies
policy and the country enjoys a free flow of
from the West. Investment in organisa-
capital, the Japanese central bank is
tional structure will become even more
­increasingly attempting to manage the yen.
important. Moreover, it will become
Its purchasing programme has led to the
increasingly difficult in the West to raise
trade-weighted yen currently being severely
the educational level of the working popu-
undervalued. This is having an upward
lation due to the progress already made in
effect on inflation. The inflation forecasts for
this field over the past few decades.
emerging markets are very mixed. Brazil
Emerging markets do still retain capacity
and Russia are likely to face very high
for this, however, both in quantitative and
­inflation, while inflation is expected to
qualitative terms.
remain low in China. 
Single market?
Factors beyond the sphere of influence of
business have also contributed to the slowdown in growth. Some analysts claim that
the reforms and regulation of the financial
sector have decreased the banks’ ability to
issue loans for new corporate investment,
especially for small and medium-sized
­businesses. In Europe, the inability to create
a single market for goods and services has
reduced the regional capacity to upscale
economic activity and achieve higher
productivity.
Ruth van de Belt
Investment Strategist
[email protected]
Kempen Insight, November 2015
13
Books THAT INSPIRE
Crises compared
Hall of Mirrors offers a comparative
analysis of the two great economic and
financial crises of the last hundred years:
the Great Depression of the 1930’s and
the Great Recession that started in
2008. The response to the Great Depression still shapes the way society today reacts to economic problems. In
2008, policy makers prevented a catastrophic depression but not the rise of
unemployment to excruciating high levels. Eichengreen
seeks answers to the question why we didn’t avoid making
some mistakes twice, while also showing how the experience
of the Great Recession will permanently change how we
Evert Waterlander is
Director Client Solutions at
Kempen. He selects books on
investment for Kempen Insight.
[email protected]
think about the Great Depression.
Hall of mirrors
Barry Eichengreen
ISBN 9780199392001
THE MAKING OF
Insight,
the macro movie
á Film maker Emiel Elgersma: ‘Once more’!
â Jan Bertus Molenkamp, Roelof Salomons and William de Vries are recorded on film as they address the Dutch pension system,
long-term forecasts and the interest rate, respectively.
14
Kempen Insight, November 2015
Don’t be afraid of machines
Economic history lesson
We are approaching an era of un-
Bernstein examines the concept of
precedented
and
investment risk from a long-term
­
exponential growth with systems
opportunities
­investor’s perspective. This approach
that can compete with the human
dismisses the frequently-used con-
capacity for thought. Self-driving
cept of volatility as white noise.
cars are no longer a Utopian dream.
A deeper- rooted investment risk is
What impact will this have on
an event that a­ ffects an investment
economic
­
Traditional
portfolio in such a way that capital
methods of measuring productivity
restoration is unlikely even in the
prosperity?
neglect the v­alue of digital innova-
long term. Bernstein does not offer
tion. The benefits of digital advances
a Black Swan theory, but instead revisits e
­ conomic history.
are therefore not being felt throughout society. The ­authors
The latter shows there are four recurring investment risks:
see a parallel with the industrial revolution, when Keynes
­inflation, deflation, confiscation and ­devastation. Which of
described the process of economic adjustment. Brynjolfsson
these four risks is most likely to occur and which asset class
and McAfee’s book contains prescriptions for policymakers.
offers the best protection? Viewed ­historically, the answer is
Above all, be alert and focus primarily on reforms with a view
inflation. The author believes that an ­internationally-diversified
to ­continuing development rather than fighting the changes
equity portfolio provides the best protection against most
wrought by these technological advances.
types of risk.
The Second Machine Age
Erik Brynjolfsson en Andrew McAfee
Deep Risk: How History Informs Portfolio Design
William J. Bernstein
ISBN 9780393239355
‘Once more’...
Posing in front of the
camera is not part of the
daily routine for the leading
actors of Kempen.
However, that does not
stop these gentlemen from
responding suc­cinctly and
clearly to a statement
about their area of
expertise.
Read their comments at
Kindle edition (amazon.com)
á
Looking ahead to 2016: not a problem for Lars Dijkstra.
â Paul Gerla and Jan Bertus Molenkamp go
for a final take.
www.kempeninsight.nl/en
à Outdoor shots of the premises
of Kempen at Zuidas (­Amsterdam’s
financial district).
Kempen Insight, November 2015
15
/// tekst Lars Dijkstra foto xxx
Stress scenarios
4
The
horsemen
of the apocalypse
There is no certainty that the central scenario for the next
decade will occur. For this reason, each year we formulate
a number of alternative scenarios. A temporary loss of capital
occurs fairly frequently: financial assets fluctuate in value. As an
investor you need to be much more concerned about
permanent losses. This year we have focused on factors that
could lead to a permanent loss of real capital.
16
Kempen Insight, November 2015
/// by Florian Broekhuizen images MARIO HOOGLANDER, HENRIKE BEUKEMA
Horseman 1
Inflation
global equities, real estate, commodities
frequently in emerging markets, for instance
and inflation-linked bonds, provide the best
in the shape of capital controls or expro-
protection against an inflationary climate.
priation. These are usually a result of failing
government policy combined with a banking
Inflation is the disaster scenario that historically
occurs most frequently. The impact on the
economy is enormous. Examples of periods of
Horseman 2
Deflation
system under huge pressure. Capital controls
are used in an attempt to prevent a total
collapse of the financial system. This may be
in the form of a haircut, as occurred in
major inflation are the 1920s in Germany, the
1970s in the US and the 1980s in South America.
A long period of deflation has occurred very
Cyprus (2013), a currency devaluation as in
Over the past few years we have witnessed high
rarely in history. One of the best-known
Venezuela (2014) or the Asian crisis of 1998
inflation in countries such as Turkey, Russia and
periods is the Great Depression. The cause
when capital controls were applied widely.
Brazil.
is often a drop in demand t­riggered by
The main impact of (high) inflation occurs via
deleveraging, with far-reaching negative
the supply side of an economy: how productive
consequences: rising unemployment,
a country is and what its government policy is.
declining wages, write-offs on equity
-Declining productivity decreases a coun-
capital and growing numbers of bankrupt-
try’s self-sufficiency and makes it import
cies. However, these far-reaching conse-
Devastation comes in many guises. The two
more. This creates a deficit on the balance
quences are also precisely the reason why
main forms are natural disasters and disaster
of payments, which in turn places the
deflation occurs so seldom. Policymakers
caused by humans, such as currency wars,
currency under pressure and pushes up
will do everything they can to prevent
trade wars and military conflicts. While
(import) inflation.
Horseman 4
Devastation
deflation and have plenty of tools at their
natural disasters can cause major humani-
-Budget deficits grow when governments
disposal to do so. All the government has
tarian hardship and severely affect individual
spend too much structurally. The main
to do is increase spending in order to drive
countries, they seldom leave permanent
negative effect of this is that private produc-
demand in the economy and the negative
damage. The impact of disasters caused by
tive projects are squeezed out in the contest
spiral of deflation is broken. If a deflationary
humans is often much greater, but also
for capital. Moreover, monetary policy is
period does occur, equities and real estate
generally confined to a smaller area. Diver-
increasingly aimed at keeping government
are vulnerable due to shrinking equity
sification is the best way to protect yourself
finances manageable, which leads to extra
capital compared to debt levels, while
against both stress scenarios, with a prefer-
monetary growth. The result is upward
investments such as long-term government
ence for real assets such as real estate and
pressure on inflation.
bonds, gold and cash in fact benefit from
equities. Although history shows that
this climate.
horsemen 3 and 4 can harm investment
-In many countries wages are (implicitly)
portfolios permanently, natural disasters are
linked to prices, which means that when
inflation occurs it becomes self-perpetuating.
Inflation can undermine investment portfolios in two ways. Firstly, all investments
with a nominal pay-out, such as bonds, lose
Horseman 3
Confiscation
notoriously difficult to predict. Taking this
into account when structuring the investment portfolio is therefore difficult, other
than by applying diversification. 
a great deal of value in the event of (unexpected) high inflation. Secondly, the cost of
Confiscation can take many forms. One
doing business in an economy rises, leading
moderate form of confiscation is taxation.
Florian Broekhuizen
to real economic growth declining. Invest-
More extreme forms of confiscation are fairly
Investment Strategist
ments with a real component, such as
rare in the Western world. This occurs more
[email protected]
THE KEMPEN VIEW
The modified economic growth forecasts
and persisting disinflationary trend are causing investors to worry about deflation.
One visible consequence of this is the high valuation of government bonds.
However, we believe that the risk of deflation is being overestimated. Governments
and central banks have both the will and the means to prevent deflation. In our
view the risk of inflation is much more real, as long-term over-stimulation can harm
the supply side of the economy, causing prices to rise.
Kempen Insight, November 2015
17
/// by LUUK JAGTENBERG
image MARIO HOOGLANDER
Does risk
still pay?
How attractive are the
individual asset classes
in the coming years?
Investment strategist
Luuk Jagtenberg looks
at each asset class
in turn.
Are we still being rewarded for taking risk?
sufficient reward. However, this high-yield
The expected returns on almost all the asset
debt has generally been issued by countries
classes are low from a historical perspective
now facing a slowdown in the business
and on average stand at about the same
cycle, leading to substantial risk in the
low level as a year ago. In view of current
medium term. Moreover, many emerging
valuations for risk-bearing investments and
market currencies are difficult to hedge.
the very low expected return on govern-
These two factors combine to make high-
ment bonds, we believe that we are still
yield emerging market debt unattractive at
being rewarded sufficiently for taking risk in
the moment.
the long term. However, the high
­valuations and elevated market volatility
Value beats growth
will yield more frequent negative returns
The expected return on equities remains
than in the past few years.
low in a historical context. In contrast to
Bonds?
18
Kempen Insight, November 2015
government bonds, equities are still
offering sufficient reward for the risk
Government bonds are very unattractively
­investors take. However, there are huge
valued. Such low valuations are only
geographical variations. Emerging market
­justified in the case of long-term deflation,
equities are attractively valued. This is the
which is one our stress scenarios. However,
only region where the expected return is in
we expect yields on government bonds to
line with the long-term average. European
rise and revert to normal levels over the
equities are valued neutrally, while US and
next ten years. This will be accompanied
Japanese equities are too expensive. The
by negative price returns, especially if yields
expected reward for risk also varies
rise abruptly. The current low expected
according to the equity styles. Within the
returns provide insufficient compensation
developed markets, so-called value equities
for this risk.
are attractive compared to growth equities.
In the case of credits, there is still sufficient
The relative difference in valuation between
reward for the credit risk taken. Credits are
growth and value equities has seldom been
therefore valued neutrally. High-yield
so great.
emerging market debt currently also offers
Given current valuations, we recommend a
Change
WAARDERING & RENDEMENTSVERWACHTING /// tekst LUUK
JAGTENBERG
Overvalued
Undervalued
(from last year)
Europe
United States
Equities
Japan
Asia ex Japan
Emerging markets
EMU core
EMU countries
Bonds
EUR credits
UK gilts
UK credits
High yield
EMD
High yield credits
Listed EU real estate
Alternatives
Non-listed EU real estate
Hedge funds
Source: Kempen, November 2015
larger than normal weighting for value
When currency pairs display mean rever-
there may be more appealing alternatives.
equities.
sion, in other words revert to their long-
It is often impossible to take advantage of
Last year we described how listed real
term average value, investments listed in
this due to the lack of liquidity. A conserva-
estate was attractively valued and had
foreign currencies will be worth less for
tive approach to non-listed investments is
­sufficient return potential. A great deal has
a euro-based investor. Although hedging
therefore essential and this is why we apply
happened over the past year, especially as
foreign exchange risk to the full is generally
an ample safety margin to the valuations of
concerns European listed real estate. Market
not the best long-term option, we would
such investments.
prices soared in the run-up to the ECB’s
recommend a high degree of foreign
quantitative easing programme and at one
currency hedging given current exchange
Commodities
point were as much as 30% higher than the
rates.
Although commodity prices have dropped
level in our previous scenario update.
sharply over the past year, commodities as
Valuations rose substantially and listed real
Sufficient liquidity
estate subsequently became less attractive
In today’s low-yield climate it is also worth
attractive investment. We do not expect
again. In the case of European listed real
considering non-listed investments, such as
commodity prices to revert to the levels we
estate, the expected return barely compen-
infrastructure, mortgages or non-listed real
saw a few years ago. The oil price is likely to
sates for the risk taken. In relative terms,
estate. On average, these investments
be lower than it has been in the past due to
European equities or, from a diversification
currently are providing sufficient compensa-
technological and geopolitical trends. The
perspective, global listed real estate are
tion for the risk taken. However, there are
roll yield, a major source of return/costs
a more attractive option.
variations within asset classes: for instance,
that occurs on rolling commodity
Dutch non-listed real estate is relatively
­derivatives forward, is also expected to be
attractive, mortgages and infrastructure are
negative for the next few months.
Currency hedging? Yes!
an asset class have not yet become an
Driven by the unconventional monetary
valued neutrally and private equity is
policies pursued by the major central banks,
currently unattractive. One major consider-
Time to reduce risk
exchange rates have been highly volatile
ation in non-listed investments is the lack of
Our central scenario and current valuations
over the past two years. The rates of the
liquidity: it is often very difficult to with-
yield expected returns that serve as input
main currency pairs spent some time
draw from a position early. For example,
for strategic portfolios, i.e. those portfolios
­fluctuating around their long-term average,
once capital market yields have normalised
that are best able to meet the investment
but this recently came to an abrupt halt.
over the next few years, the current extra
objectives in the long term. Although the
The euro is currently undervalued, while the
reward for risk of many non-listed invest-
objectives and restrictions differ according
US dollar and UK pound are overvalued.
ments will be small in comparison and
to client, after years of a positive risk
Kempen Insight, November 2015
19
­attitude it is now time to reduce the risk in
the portfolios. Over the past few years, we
have reduced the positions in high-yield
bonds to neutral. Also in the fixed income
asset class, the weighting in credits has
been reduced. We will continue this process
over the next few months. However, we
also believe it is the right time to gradually
reduce our strategic weight in equities. This
poses a dilemma: we believe that bonds are
too expensive and not yielding the returns
they ought to be. Yet the same applies to
­equities and in fact for nearly all the asset
classes. In a longer period of high volatility
a well selected portfolio of hedge funds can
offer a good alternative. Finally, equities will
continue to yield a higher return than
bonds in the long term, and the reward, i.e.
the expected risk premium, is in line with
what it ought to be. This j­ustifies a neutral
risk attitude. 
Luuk Jagtenberg
Investment Strategist
[email protected]
20
Kempen Insight, November 2015
/// by ROELOF SALOMONS images Bram Belloni, Mario Hooglander
Which route
will the business
cycle take?
Every business cycle since the Second
emerging markets will decline, but
World War has died in more or less the
strong domestic demand will compen-
at Kempen and Professor of
same way: the cause of death has not
sate for this. The low euro and oil prices
Investment Theory & Asset
been old age but ‘murder’ by the central
will boost consumer spending. Compa-
bank. As the end approaches, corporate
nies will increasingly contribute to
margins narrow, wages and inflation rise,
growth. Yet the European economy will
as do commodity prices. Central banks
be affected by weak global trade once
respond by raising interest rates in order
the US enters the next phase. The good
for a long time, the drop in demand
to curb overheating. Profits are squeezed
news is that Europe’s competitive
from emerging markets is causing lower
and companies respond by cutting costs
­position has improved considerably and
prices and the global economy is
and postponing investment.
that monetary policy will remain
­experiencing difficulty in growing on
The economy is entering the final cyclical
­expansionary.
trend, you are only a single external
phase in the US, whereby wage growth
Asian and emerging markets will
shock away from a (growth) recession.
is accelerating and interest rates are
continue to weaken in the short term.
And in this case it is not the central banks
slowly rising. The latter is very moderate,
The Chinese economy is in a period of
that will put an end to the fun.
as in spite of low levels of unemployment
transition: from investment and exports
The catalyst could also come from the
there are still plenty of people who want
to consumption. We do not predict a
financial markets if they demand higher
to work and inflation is low. Pressure is
hard landing in China as has occurred in
risk premiums. The restricted cashflows
growing on earnings, on investments
many emerging markets. Those coun-
will squeeze the financing of debt.
and on the job market. The US will head
tries whose growth depended on debt
­Investors will be confronted with losses
towards a recession as in 2017. The UK
growth (often in US dollars) or exports to
that will cause extra volatile outliers in
will also experience a slowdown by then.
China will have to implement further
credit spreads due to the restricted
Both consumer spending and invest-
reforms, after which they can resume
liquidity of the bond markets. It is then
ments will contribute less to the
their upward trend. Japan is the odd one
a small step to companies in the West,
economy and the referendum on a
out in Asia. Its economy will continue to
led by the US, reviewing costs and future
possible Brexit will cause companies to
stutter over the next two years.
investments. In this scenario it would be
Roelof Salomons is Chief Strategist
Management at the
University of Groningen.
[email protected]
the first time in decades that we cannot
postpone investments. The Bank of
England will follow the example set by
This is the most likely scenario. Yet there
directly blame the central banks for the
the Fed and raise interest rates.
is an alternative that is becoming more
recession. This is highly unusual. On the
The European recovery will continue
and more probable. In a climate in which
other hand, so were seven years of
over the next two years. Exports to
profit margins have been under pressure
interest rates at zero percent… 
Kempen Insight, November 2015
21