Investment Outlook

Investment Outlook fourth quarter 2014



“If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand” Milton Friedman, 1912 - 2006

If a CEO of a global company could choose his business environment he would probably be attracted to the following items currently present in the economy: Steadily declining input prices because commodity and energy prices are low or declining; Low inflation causing no need for renegotiation of contracts and employees being less demanding for pay increases, which is further enforced by high unemployment triggering more loyalty; Low interest cost causing debt to come at relatively low cost; Governments with improving balance sheets that are not cutting cost and spend all their income and more in both good and bad economic times; And corporate customers that have relatively low debt levels and default probabilities. He would however probably be worried about: Customers which are unwilling to increase their spending, slow economic growth partially due to aforementioned unemployment and the increasing level of instabilities on a geopolitical level. For our investment policy this implies that, barring some uncertainties, global financial markets are in a scenario which is uniquely favourable for equities.

Over the last quarter economic developments in Continental Europe and the United States has been diverging with monetary authorities acting in opposite ways. The European Central Bank (ECB) is now being pressured to also enlarge their balance sheet while the Federal Reserve (FED) is moving to decrease stimulus. This has been one of the reasons for several currencies including the Euro and Yen to continue depreciating versus the Dollar. Internationally this makes these economies more competitive and could give a much needed boost. Historically, strong U.S. growth, like we have seen recently, can help Europe attain higher growth rates. In fact, the economic growth in the US combined with a strong Dollar could take over China’s role as growth engine and lead the world GDP to increase at a level above the 3% of the last three years.

Chinese growth is still expected to be lower but above 7%. If the new leadership in India can live up to expectations, potential growth is higher than for China. In Latin America and especially Brazil the political elections can be decisive for the region to come out of the current stagnation.

Because of the fragile recovery we expect central bank rates in both the U.S. and the EU to stay low the coming months. Inflation has been low in all developed economic regions and, even though the U.S. has shown growth, this is still fragile. In Europe the aggregate loans from banks to households and companies is decreasing and inflation is far below the ECB target of 2%. Bond yields could increase further when the U.S. bond buying completely ends and the FED becomes more concrete about raising rates, but the increased savings quota in the world is causing a large amount of liquidity to be in search of an acceptable return.

The relative valuation between equity and fixed income is strongly in favour of equities as the gap between dividend yield and bond yield remains historically wide, especially in Europe. Looking at cyclically adjusted price earnings ratios, equity valuations are also high, fuelled by low interest rates. However, we still believe with proper stock selection and focus on earnings growth, decent returns can be expected from equity.

Some of the potential risks we continuously monitor are: i) the possibility of a liquidity crash due to the larger fixed income ETF market and the lower dealer inventories, ii) an increase in geopolitical problems, iii) potential protests due to high unemployment in Europe, iv) EU turmoil due to the large differences in the level of success that EU governments have in reforming their economies and v) the inability of companies to sustain their high margins.

Asset Allocation

The stock market has shown high returns over the past two years. We have been overweighting equity and liquidity and underweighting fixed income. Due to unexpected further decreases in interest rates this low fixed income allocation has not been value accretive so far. However, we believe in maintaining the course, as expectations and current fundamentals of our policy have not changed. With our focus on value stocks we bear lower market risk than the benchmark.

With low allocation to fixed income and predominantly low duration bonds, the portfolios are positioned to properly withstand a possible period of slowly rising interest rates.

Precious metals keep their insurance characteristic for when risk sentiment turns. Energy prices are not responding materially to the turmoil in the Middle East, but rather reflect overproduction and stagnating demand. Real estate and Private equity management companies continue to add diversification benefits to the portfolios.



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.