Investment Outlook

Investment Outlook third quarter 2015



“Do not trust the horse, Trojans. Whatever it is, I fear the Greeks even when they bring gifts”.
Virgil’s Aeneid, book 2, 19 bc

A stance of the global economy should be taken to allocate portfolios accordingly. World economic growth has been disappointing expectations with such consistency that one would assume these expectations to be set with greater pessimism each year; but new expectations are still adjusted downwards. The past three years expected global growth has been adjusted downwards by half a percent over the respective year and growth stayed close to 2%. A governing body that must have felt similar disappointment is the U.S. Federal Open Market Committee, a group of twelve knowledgeable representatives that set the U.S. monetary policy & Federal Funds Fate. It projected in December 2014 a consensus interest rate of 1% at end of 2015. Most recent revision halved this to 0.5%. With this unimpressive track record in mind and in the current situation of historically low interest rates it is challenging to put a market outlook on paper.

Starting off with the positive: macroeconomic news flow has been increasingly positive for both Europe and the U.S. Purchasing Managers Indices, a leading sentiment indicator, remains in positive terrain. Labour markets are improving and housing markets are carefully joining in on a recovery. Inflation is low, but not negative in the U.S., China and Europe. Central banks in virtually all large regions still heavily stimulate the economy. This includes the U.S. where talks of tighter policy already started over two years ago. Nevertheless, this favourable environment is not translating into high growth because the developed world remains in a state of deleveraging. Fiscal debt levels have not come down and debt to GDP ratios only declined for a few developed countries. Private debt has remained high. With a newfound focus on deleveraging, even the U.S. stereotype of a shopaholic nation is called into question as savings on gasoline are dedicated to relieve debt burdens.

Moving on to the more negative: The political image is more grim. The Greek problems show the long way that the Euro monetary union still has ahead of itself. Greece’s antics will be manageable for the EU region, but it sets an inconvenient precedent for other far larger countries with significant restructuring requirements ahead like France and Italy. Negotiations clarify how little power Brussels and Frankfurt have to enforce the prerequisites for monetary integration. In the U.S. the president seems incapable of achieving improvements in the political deadlock which is likely to continue until the elections next year. Reality has also caught up with the high expectations for new leadership in India and Indonesia where corruption and bureaucracy is slowing down large scale economic improvements for both countries.

Due to the positive economic indicators, the global economy is expected to grow 2.5 to 2.8% the coming years, but below trend. Inflation is expected to remain low as decreased energy and commodity prices work their way into the real economy, forcing central banks to keep monetary policies accommodative. The dilemma for equities is: whether current valuations are justified with this continued low growth scenario. While for bonds, yields are at a level that sizeable downside risks need to be assumed for limited upside.

Asset Allocation
Equity allocations have further been gradually reduced in the portfolios during the last months, but still somewhat overweight. The high rate of return at the beginning of the year was partially used to acquire some downside insurance in the form of index put options.

Reasonable relative valuations can still be found in individual stocks that offer good and stable dividend yields with conservative balance sheets. To further fortify the portfolios, allocation to precious metals is now at neutral weight. Allocations in real estate are underweight and being maintained in high quality companies with limited loan-to-value ratios that should benefit from sustained low interest rates and investors looking for yield.

The Laaken mandates currently have a relatively high percentage in liquidities, in order to keep overall risks low and to maintain flexibility to respond in case of a possible sell-off. Portfolio duration is also lowered by retaining more liquidity and the interest offered by Dutch custody banks is still relatively attractive. For bonds, more interest rate exposure is taken in Euro denominated bonds rather than in U.S. Dollar bonds as chances are higher that the U.S. Federal Reserve Board will raise rates.

The currency diversification beyond the Euro will be maintained with allocations to strong currencies like the U.S. Dollar, Singapore Dollar and Swiss Franc. The foreign currency risk is held as protection against the continued uncertainty in the Euro area.



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.