Investment Outlook

Investment Outlook second quarter 2014



“Fashion is not something that exists in dresses only” Coco Chanel

Investors went into 2014 discarding last season’s trends. “The great rotation” and “taper tantrums” were forgotten as bonds outperformed stocks. Developed markets had their worst start in five years and “fragile five” country stocks showed strong performance. During the first quarter of the year macroeconomic data has been distorted by extreme weather like the heavy rainfalls in the UK and the polar vortex in large parts of the US and festivities like Chinese New Year. In the coming quarter data should be more comparable with the same period one year ago. We expect clearer indicators of global real economic growth of between three and four percent.

Developed markets are expected to continue their path of economic growth paired with low inflation. In the US the Fed continued to reduce their bond purchases and the markets took this in stride. Labour and housing market statistics are improving and the Fed is showing a pickup in consumer and commercial loans. We expect this to continue in the next quarter. In Europe monetary policy remains moderately easy. The restrictive fiscal policy is still hampering growth, yet to a lesser extent than in 2013. Economic indicators follow the pattern of the last couple of quarters with moderate economic growth, low inflation and further improvement. Finally, the effects of Japan’s attempt to stimulate the economy into inflation and growth are not clear cut. We expect this policy to be positive for Japanese consumption and for Japanese stocks. The recent tax rate increase should be mitigated by further stimulus in the short term and is good for government budget in the long term.

Emerging markets show a continued divergence in performance since May last year caused by many different economic policies. We expect China to attain their expected seven percent growth, if necessary through stimulus. Shadow banking worries seem exaggerated as their size relative to bank assets is only about one fifth of that in the Netherlands and the US. We remain more positive on regions that are less dependent on foreign investment to finance growth. Second quarter elections in Brazil, India and Indonesia could be positive for government spending and economic growth.

Although valuations in developed markets are full and for some individual cases even stretched, we still believe that it makes sense to be overweight in equities. The low interest rates are here to stay for at least the medium term and there is still a lot of dry powder and cash on the side. This is not only the case among private and institutional investors, but most corporations are also cash rich. Some of this cash is used for buy backs, dividends and acquisitions. A couple of these takeovers are really grabbing the headlines. Contrary to developed markets, developing markets show lower valuations and are in some cases valued below September 2008 levels. Volatility in these markets is high partly because some markets have the same investable size as one large cap western company only.

Asset Allocation

We remain overweight in equities as valuations seem decent given that earnings are on average expected to increase by ten percent. Companies generally have strong balance sheets, but are still giving cautious outlooks with their Q4 earnings reports.

Less excitement is expected in bonds where credit risk seems to be a better bet than establishing view on where interest rates are going. The risk of being underweight in fixed income lies in the fact that almost every investor is positioned short duration like us. Liquidities remain a large part of the portfolio’s fixed income allocation to make use of the abnormal interest rates offered by Dutch custody banks.

The moderate economic global recovery and slower growth in especially China will continue to impact prices of industrial commodities. Droughts, floods and other climate factors are causing soft commodities to fluctuate in too unpredictable ways. Our positions in precious metals are to insure the portfolios against market turmoil caused by events such as the Ukraine crisis.

Private equity management companies and real estate remain useful for diversification and adding value in a low interest environment. We retain exposure in low leverage solid real estate companies as they should have the least negative effect from a possible rising interest rate.



Because Japan is the third largest economy of the world and home to many leading and innovative multinationals, we are keen to invest in Japanese equities. At the same time, it can be difficult to find Japanese companies that meet our selection criteria. With our recent purchase of Nintendo, known for games such as Mario, Pokémon and Zelda, we believe we have added a Japanese company to our portfolio that meets our quality requirements. 


For every share that we buy and sell for our customers, a commission is paid to the broker, which in most cases is the custodian bank. For them, these commissions are an important source of income. Because this is an industry that we deal with every day, we used our first-hand knowledge when we selected a broker as a potential investment last year. We took a position in a company named Interactive Brokers.