Investment Outlook

Investment Outlook second quarter 2017



We should not develop a habit of retreating to the harbour whenever we encounter a storm, for this will never get us to the other side of the ocean.”

President Xi Jinping at Davos world economic forum 2017


World economy

Based on the performance of the world economy, the world seems to be doing better. Recent statistics are robust. Consumer spending in the US grew with 3.5% compared to a year ago. The recently released quarterly profits of US companies grew over 9% on a yearly basis. Europe is also improving based on macro-economic figures: unemployment decreased by almost 2% over the past 24 months, banks are carefully lending out more to the corporate sector and sentiment indicators amongst purchasing managers are strongly positive. Aside from that, European Central Bank stimulus seems to be ongoing. Most emerging economies are also in a better position than twelve months ago, when the market was still overshadowed by worries concerning capital flight from China. Japan however, is showing little economic improvement.

On the political front, a staggering amount has been written on the US president’s first two months in office. Our take on the situation is that, due to the many international business people surrounding him, the feared protectionist measures will not be drastic. Expectations following the promises President Trump has made are high, but the execution seems to be more challenging then he has led the general public to believe. Relative to other developed economies the US government is a smaller part of GDP. The private sector on the other hand seems to have been performing well even before the inauguration. Irrespective of the tumult in the White House, this part of the economy can continue its performance. Political developments in Europe like the Dutch elections have been received positively by the financial markets. The threat of more extreme and populist parties gaining strength have diminished somewhat. Nevertheless, political uncertainties keep surrounding the region. We maintain our standpoint that although the disintegration of the EU is a scenario with a low possibility, the consequences would be large. One of the lessons of 2016 is that politics is a difficult thing to predict. In other regions there is some reason for optimism. Amongst others an important regional victory by President Modi in India and a presidential term election by Prime Minister Abé in Japan. Apart from that, the planned People’s Party congress in China in October motivates the government to have the economy perform optimally at least until that period.

To convert the above to an investment policy the valuation of different asset classes and regions need to be evaluated. These valuations remain high. First of all, stock markets in developed countries, these are at or close to an all-time high. An example is the Dow Jones passing the 20.000 level in the first quarter followed by a lot of media attention. The index is now already closer to 21.000. It can be concluded that the favourable macro developments are at least already partly priced in. Stock markets in developing countries have also performed above our expectations. Second, looking at bond markets, it seems higher inflation expectations have not convinced bond investors. With capital intensive stocks outperforming, the stock market seems to position for more inflation. With current inflation expectations of 2.1% and yield on US treasuries at only 2.4%, the bond market participants seem to be pricing in less inflation then their equity counterparts. One could add to this the consensus expectation that the FED will still hike rates twice this year. These two reasons for expecting higher yield make that no capital gains can be expected from the bond market. Finally, profit growth expectations for individual companies are high. It would be positive for stock prices if these expectations will be fulfilled, but with 20-25% profit growth expectations for the US and Europe, there is a lot of room to disappoint the market.

Asset Allocation

The slight overweight in equity performed well, but especially the individual selection of stocks like Investor AB, Uniper, ASML and Apple have contributed to the strong outperformance over the first quarter. We maintain the overweight in equity as the relative valuation of different asset classes is still in favour of equity. Within bonds a part of the portfolio is invested in short US Dollar bonds. Furthermore interest rate risk is higher in Euro denominated bonds. The high allocation to cash is maintained because the interest rate is relatively attractive. Real estate has a neutral allocation given that these shares have already experienced a sizable correction in the rate increase during the fourth quarter of 2016. The allocation to gold is maintained, partly because of the considerable political risks. The diversification away from Euro in fundamentally strong currencies will also be maintained. Portfolios remain overweight in US Dollar, Swedish and Norwegian Krone, Singapore Dollar and Swiss Franc.