Investment Outlook

Investment Outlook first quarter 2017



A hideous hermaphroditical character, which has neither the force and firmness of a man, nor the gentleness and sensibility of a woman.” - “a mean-spirited, low-lived fellow, the son of a half-breed Indian squaw, sired by a Virginia mulatto father.”

Jefferson's campaign on President Adams and in response Adams' campaign on Vice President Jefferson, 1776



World economy

Since our last outlook, the main change is the elected US president. At the time we wrote that the election would have little impact on our view of the US market, but this was an underestimation. Partly because of the extreme rhetoric during the election, the new president was not perceived as a potential candidate. The selected quote from 1776 shows that, while regrettable, extreme rhetoric is not a new phenomenon.

For the first time in six years in the US, a single party has a majority in both the Senate and the House of Representatives. Because of this, laws can be more rapidly implemented in the next two years. The pronounced shift from tight fiscal policy, coupled with loose monetary policy to an expected policy with broader government spending and tighter monetary policy causes a shift in financial markets. The yield on ten-year US Treasuries rose 1% to 2.5% and inflation expectation for the US increased to between 2% and 2.5%. With such an inflation forecast US government bonds should currently be yielding 1% more.

We expect that the announced fiscal stimulus in the US will be substantial. Especially tax cuts can be quickly implemented by a government. As previously seen with the rollout of the monetary easing program by the Fed, more fiscal stimulus than initially announced could be deemed necessary. Other regions of the world may follow the example of the US and emphasize expansion of government spending. Several major regions increasing public expenditure could lead to more economic growth and possibly more inflation.

Summarizing the aforementioned, the outlook for the US has improved. This positive outlook could also convince businesses to higher capital expenditure. Business investments have negatively contributed to economic growth the last years. However, expectations of market participants for the US economy are already high. Unemployment rate is already at a low level and increases in productivity have been minimal. Therefore, it is possible that inflation increases. The US Federal Reserve (FED) could decide to further tighten their still accommodative monetary policy. If interest rates increase due to higher economic growth, we deem equities in the US as attractive despite the high valuation, but risk-free bonds would decline in value.

For Europe, higher US growth is positive. Rate hikes in the US could lead to a stronger US Dollar, making the EU more competitive internationally. The European Central Bank (ECB), in contrast to the Fed, announced to keep interest rates low and continue buying bonds. With more emphasis on higher public expenditure, however, we remain concerned about the continuing structural problems in the EU. More government spending implies a breach of the Maastricht treaty for several countries and the opinions on this vary widely between the Union members. The aftermath of the British referendum and elections in the Netherlands, Germany, Italy and France in the first half of 2017, provide many occasions where the EU's unity could be tested anew. Although the disintegration of the EU is a scenario to which we assign a low possibility, the consequences would be large.

The outlook for China is uncertain. The government can’t simultaneously perform all facets of its economic plan. When capital expenditures are reduced, the financial system shows problems. Export boosting through a weaker Renminbi leads to capital flight. Capital flight restraint weakens the position of the Chinese currency as a reserve currency in the world. In addition, the relationship between China and the US has become more uncertain.

Emerging markets will have difficulty in a scenario of a strong US dollar and higher interest rates from the Fed. However, the strong performance of the Brazilian stock index in 2016 has once again made it clear that valuations are also an important factor. Brazil remains too chaotic to invest in. Besides China, we limit ourselves to evaluating investments in two regions where the political development is positive: Indonesia and India.


Asset Allocation

Allocation to equity was increased to slightly overweight in the recent strong stock market. If risk is further increased, we consider domestic US equities. Within bonds a part of the portfolio is invested in short US Dollar bonds. Furthermore more interest rate risk is taken in Euro denominated bonds. The high allocation to cash is maintained because the interest rate is relatively attractive. Real estate has a neutral allocation given that these shares have already experienced a sizable correction in the recent rate increase. The allocation to gold is maintained, partly because of the considerable political risks. The diversification away from Euro in fundamentally strong currencies will also be maintained. Portfolios are overweight in US Dollar, Swedish and Norwegian Krone, Singapore Dollar and Swiss Franc.

3 January 2017



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.