Investment Outlook

Investment Outlook first quarter 2016



“By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens”
John Maynard Keynes,1883-1946


The beginning of the year is a moment to evaluate our outlooks of the past year. The expectation that the U.S. stock market should perform better than Europe was incorrect in local currencies, however adjusted and thankfully for currency movements appeared to be correct for EUR investors. Positioning in USD and stock selection added to our outperformance. The U.S. stock market clearly showed how the “Nifty Nine”: Facebook, Amazon, Netflix, Alphabet, Priceline, eBay, Starbucks, Microsoft and Salesforce, returned over 60% last year, with the S&P500 index returning 1%. A potentially great year for most active investors.

Going forward, we expect the world economy to continue its sub-trend growth, and are adjusting our previous positive outlook down to a more neutral stance in our portfolios. Multiple macroeconomic indicators still fuel our positive stance, amongst them: inflation remains low because of oversupply in raw materials and energy, accommodative monetary policy continues, loans to corporations and households are increasing and consumption is set to increase. On the other hand, several risks reduce our optimism. These include increased geopolitical threats, large policy dependence of financial markets, continued need for government and household deleveraging and increased correlation between asset classes.

In equity, two allocation strategies achieved good returns the last couple of years and we aim to continue to follow these while reducing equity weightings in the portfolios. The first has been following the quantitative easing (QE) programs executed by the large central banks. These programs reduce cost of debt, and cause the valuation of assets to increase. Five of the large central banks currently hold more than USD 16 trillion in balance sheet assets (close to 20% of global GDP) up from about 7 trillion in 2008. Easing is still ongoing in all large economic regions. The US carefully initiated steps towards a less accommodative policy, but in Japan, Europe and, to a lesser extent, China central banks are still vigorously easing monetary conditions. We see few reasons for policies to tighten and expect this as a continued positive driver for stocks going forward.
The second strategy has been to allocate to countries or sectors that are expected to experience positive earnings growth. Last year this was Europe, mainly driven by weakening of the Euro and collapse in energy prices. Of the developed markets we expect the United States to show the best relative profit growth for the coming year, followed by Japan and lastly Europe. We shy away from Europe as the political situation seems to be deteriorating. In emerging markets valuations are starting to look attractive but the Corporate Governance and Environmental and Social management of individual companies requires extra attention. We remain positive on selective Asian countries while continuing to avoid Latin America. China is the source of a lot of uncertainty. The country needs to reform economically and corruption is being fought aggressively. Sector specific: Consumer, Technology, Medical Technology & Care and Real Estate remain attractive. Specifically Advertising, Internet and Specialty Apparel are sectors that could show healthy profit growth. Basic Materials, Energy and Utilities seem to have far less attractive outlooks, but we can take opportunistic positions if valuations seem to exaggerate this.
Real estate stocks have been trading like bonds with large interest rate risks, even though individual companies are not in need of external financing. They should benefit from continued low interest rates and conservative loan-to-value ratios. Listed Private Equity stocks valuations have gone up in Euro terms, but some are very successful in adding additional return to their investment portfolios in low yield environments.

For bonds the market remains very policy dependent. As we expect continued easing and low inflation, especially in Europe we still hold on to long duration bonds. The recent sell-off in riskier bonds is also creating some opportunities in corporate bonds and high yields. The fact remains that a degree of risk needs to be taken to still earn more than the interest rates on savings account offered by banks.

Currencies have played a vital role in the attained returns over 2015 and are expected to continue doing so in 2016. 2015 was a poor year for US investors while European investors posted positive returns because of currency movements. Due to the divergence in monetary policy between Europe, which is expected to need additional easing, and the US, which recently raised interest rates for the first time in 8 years, we expect further USD strength. The political instability of the European Union adds to this stance and we keep our currency diversification as a protection against this.

Asset Allocation
The composition of the portfolios has had little change over the last quarter. Due to the relative valuations we remain overweight equity and underweight fixed income, but we are reducing this difference. The large allocation in liquidities is maintained to benefit from the artificially high, albeit still low, credit interest rates offered by Dutch banks and to manage the overall portfolio risks. The portfolios will be neutrally invested in listed private equity and real estate stocks. Finally, within commodities the portfolios are under weighted, limited to precious metals, as an insurance against unforeseen adverse events.



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.