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Investment outlook third quarter 2020

"As we described in our Investment Outlook last quarter, we believe that the effects of the Covid-19 pandemic will have long-term adverse effects on the economy."

"Speculation is most dangerous when it looks easiest."

- Warren Buffett

World economy

During the second quarter of this year global stock markets have largely recovered from the crash in Q1. While European indices showed a negative year to date return of around -10% by the end of the quarter, US stock indices were almost back at January 1 levels. The Nasdaq index, less affected by the Covid-19 crisis because of its technology weighting, achieved a positive year to date return of 13%.

The main reason behind this recovery is the monetary easing of the various central banks. Since March, the ECB’s balance sheet grew from EUR 4.7 trillion to EUR 5.6 trillion. At the FED, the balance grew from $ 4.2 trillion to $ 7.2 trillion. By comparison, in the 6 years since the Great Financial Crisis of 2008, the FED balance grew by 3.6 trillion. The liquidity created over a period of 6 years after the previous crisis was now done in 3 months. The FED uses its digitally printed dollars primarily to purchase government bonds and mortgage-backed securities. In addition, the FED has taken the first step to start buying investment funds containing junk bonds, albeit on a smaller scale for the time being. This has a direct effect on the price of all financial products. The economy is further supported by fiscal policies. After an initial package of USD 2.2 trillion, the United States is currently discussing a follow-up package of USD 1 trillion. The EU is working on a support package for the worst-affected countries of nearly EUR 2 trillion, of which EUR 750 billion would be available immediately. Ambitious, but currently facing political resistance in some member states. Again, the amounts concerned, especially in the US, are many times larger than in previous crises.

As we described in our Investment Outlook last quarter, we believe that the effects of the Covid-19 pandemic will have long-term adverse effects on the economy. Even if the economy were to fully open up again in a few months, impact on consumer confidence and discretionary corporate spending is likely to continue for some time. This effect is exacerbated by the high level of debt that many companies carry.

This means that a large number of shares are currently not trading in line with the changes in value of the underlying business. While such discrepancies always correct over the long term, it is difficult to predict the timing of such corrections as long as governments and central banks continue to support the stock markets. For this reason, we maintain our neutral equity weighting. We are trying to use volatility to exchange stocks with a lesser outlook, such as General Electric, or stocks that have become too expensive, such as Paypal, for more defensive companies. Almost all companies in our portfolios should be able to withstand higher inflation levels. Should the monetary easing lead to higher inflation in the future, these companies will be able to pass on the higher prices to their customers.

We also take into account possible secondary or sequential effects of the Covid19 problems. A political discussion is already underway about who is to blame for the crisis and what measures should be taken. The future of the trade deal between the US and China, if it ever came into effect, is uncertain at best. In support of the domestic economy, the US appears to be moving towards even more protectionism. Trade tariffs on European goods are back on the US political agenda and visa applications for highly skilled migrants have been temporarily suspended. Worldwide, disruption in food production could lead to higher food prices, which combined with high unemployment can lead to popular discontent and possible protests, especially in emerging markets.

Finally, the emergence of the “retail investor” in recent months is striking. The fierce competition from online brokers now makes it possible for Americans to trade stocks and options without commissions. Investing seems to be the latest pastime for the many people stuck at home. While the impact of such investors on the overall market is limited, it does create some strange results in the market. Mainly because the interest of these investors seem to be focussed on a select group of stocks, such as airlines, cruise lines and companies with high brand awareness among consumers. An example in point is Hertz, whose share price increased twelvefold in the days after the company filed for bankruptcy.


Bonds and cash

Our high yield bonds have been exchanged for defensive stocks because we do not consider the yield on high yield bonds attractive. Also, due to decreasing liquidity in the market, such bonds are very volatile, causing them to fall faster than many defensive stocks during a month such as last March.


Despite the high valuations, we expect to be able to find attractive investments on an individual basis. A few defensive quality companies were added to the portfolio during the quarter.

Listed Private Equity Managers

Due to the Covid-19 problems, many private companies are for sale at attractive valuations. Private Equity can add value in such a market. We maintain our overweight position in this asset class.

Real estate

Our underweight position in real estate proved prudent this year. Since this underweight is a long-term, strategic choice, not a temporary, tactical choice, we have decided to adjust our corresponding benchmark weighting for the first time since 2007. The neutral weighting of real estate will become 5% instead of 10% as of 1 July, which is more in line with our actual positioning.


Our position in gold is maintained. We exchanged shares in Royal Gold, a company that finances gold mines and receives part of the gold proceeds as repayment, for physical gold.

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