Investment Outlook

Investment Outlook Spring 2013



‘Vote for the man who promises least. He’ll be the least disappointing’ - Bernard Baruch, 1870-1965                        


The unprecedented global massive monetary stimulus continues, leading to zero or even negative real interest rates in all major economics. Consequently risk markets continue to advance further, supported by diminished worries with respect to Europe and the Greek drama. The US stock market reached a new all-time high. The economic outlook in most regions around the world has not changed much with negative growth numbers for Europe, a slight pick-up in China at a high level of economic growth and a moderate recovery in the USA with support of an improving housing sector. The moderate economic growth in the developed markets is not reducing the high real unemployment rate of 12-13%. Governments are boxed in by the high debt/GDP ratio’s. Hence the recovery will be a very slow process. The tight correlation between the major risk markets is starting to fade because of the increasing divergence in economic performance. Inflation is not on the agenda.

Europe is on the road to the second year of negative economic growth. The private sector is not (yet) offsetting the fiscal restraint as it is focusing its investments on the emerging markets. Political and financial upheavals in Italy and Cyprus are not conducive to private consumption growth. The horizon for economic recovery is moving further into the second half of 2013. Draghi’s firm statement in support of the Eurozone last August is effective in restraining speculative attacks in Euro bond and currency markets. However, the ECB is insisting on further fiscal restraint and social restructuring, in particular in France. Inflation will remain moderate at below 2% level. 

The economic figures in the US are mixed, but the bottom line is positive in the private sector and on the business side. The fiscal deficits for the next two years are manageable, forecasted at resp. 3.7% and 2.5% under unchanged sequestration, keeping the US debt at 75% of GDP. The White House and Congress will have to get their act together to negotiate a decent budgetary deal. Extra mandatory spending cuts will increase in 2015, so there is some time left, but with all the gridlock we will get to that before we know it.  

China has seen a recent change in leadership and it looks that their economic approach will be different. The private sector will get more room at the expense of the state owned enterprises. Corruption will be addressed seriously. More emphasis on qualitative growth than quantitative growth e.g. cutting pollution. The massive urbanization of another 500 million people over the next 20 years underpins a high economic growth rate. After the stimulus in the second half of 2012, the Chinese economy has avoided a hard landing and still grows at over 8%. This certainly helps the rest of Asia, compensating for the reduction in European demand. Asian growth in consumer spending plus local and foreign investments are leading to good economic numbers. This good macro performance has not supported the Chinese stock markets. High wage increases of 15-20% and accounting scandals have cooled investors’ appetite. 

Japan experienced a stock market rally of more than a third since mid-November last year, reflecting optimism about new leadership under Prime Minister Shinzo Abe and Haruhiko Kuroda as governor of the Bank of Japan. Targeting inflation at 2% and a bold monetary and fiscal approach also led to a 15% drop in the Japanese Yen from the day early elections where announced in November. It has to be seen if these policies will work out, but for the time being the Japanese exporters are enjoying the weaker Yen and investors are feeling better about their stock portfolios.


We do not share the present euphoria in the markets. No or moderate economic growth leads inevitably to no or moderate corporate profits. Stock markets are over- or fairly valued with the exception of China. Bond yields generate negative real returns when adjusted for inflation and credit risk. Commodities will respond to decreasing demand. Consequently we have reduced risk by raising cash. In bond markets we prefer to take currency risk over duration or credit risk. Hence we are increasing our exposure in Asian emerging markets.

We limit our commodity exposure to precious metals as an insurance policy to further political and economic uncertainties.