Investment Outlook

Investment Outlook second quarter 2016



 “There are two ways to conquer and enslave a country. One is by the sword. The other is by debt.” 
John Adams,1735-1826



At the beginning of this year, risk in the portfolios has been significantly reduced. Motivated mainly by the following increased specific risks: First, Structural difficulties during economic and financial market reforms in China. Secondly, increased political uncertainty in Europe caused by discrepancies in economic status of the different EU member states and the British EU membership referendum the 23nd of June. Thirdly, the United States economic growth could be lower than expected, as job growth seems to concentrate on low wage jobs. Finally, the large decline in oil prices, although a long term positive, could lead to short term volatility in the generally debt-leveraged energy sector. With these issues still on the horizon, returns in stock markets are neutral to slightly positive, but show large volatility since the beginning of the year. None of the identified risks have materialized thus far, but they all remain present.

Although risk in the portfolio has been underweighted, the portfolios attained a similar return to the benchmark. The main driver for the recent increased risk appetite in the financial markets, which followed the negative returns at the start of the year, is the ever more accommodative monetary policy of central banks. The European Central Bank drastically lowered interest rate to below zero percent and expanded their bond purchase program. Federal Reserve Bank (FED) chair Yellen inspired a stock rally when she indicated a declining possibility of further increases in the interest rate in the US as the FED takes more global developments into account and sees the same aforementioned uncertainties. This scenario, in which negative developments in the world economy are interpreted as positive for financial markets, because it forces further accommodative central bank policy, has been ongoing for several years. Central bank easing has not yet been successful in fueling robust economic growth even though several unconventional policy tools have been deployed. Furthermore, this policy has led to high valuation of assets and financial markets. The more careful portfolio positioning is therefore maintained. This uncertain environment requires a continued focus within individual investments on robust companies with a proven business model, solid balance sheet, and an excellent reputation and track record on the individual investment level.

Recent macroeconomic indicators have shown slight improvements in the US, Europe and Asia ex-Japan. The world economy is still expected to grow below trend as corporations and consumers continue to deleverage and therefore save money instead of spending it. Government debt as a percentage of gross domestic product had increased significantly since the dot-com and financial crises in the previous decade causing politicians to be unwilling to increase public spending. The US consumer remains the best positioned to benefit from the lower energy price. Furthermore, after several years of economic growth the US economy is not burdened by fiscal drag. Europe seems to have larger structural problems and government finances still need significant reform. In Japan, the three arrows of Prime Minister Abé’s Abenomics have not yet been able to spur economic growth. Of the developed economies, the US therefore remains the preferred region. Regarding emerging markets, Latin America and Russia continue having to cope with governance issues. China is expected to continue its growth but the restructuring of the economy paired with higher levels of private debt remains worrisome. This also affects other Asian countries. Emerging markets exposure is currently very limited in the portfolios.


Asset Allocation

The composition of the portfolios became more defensive over the quarter and this is maintained going forward. Within fixed income duration in both US Dollar and Euro has been increased significantly and its allocation changed to overweight. 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. Equity has been reduced to underweight by selling some of the riskier positions and some stocks that attained a high valuation. Real estate is slowly being increased to neutral as these stocks should be able to benefit from a continued low interest rate environment. The portfolios will remain neutrally invested in listed private equity. Finally, within commodities the portfolios are neutral weighted, limited to precious metals, as an insurance against unforeseen adverse events. Gold is expected to further benefit from longer low interest rates.

A diversification in fundamentally strong foreign currencies is maintained and the portfolios are overweight in US Dollar.



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.