Investment Outlook

Investment Outlook third quarter 2017



“I have been bent and broken, but - I hope - into a better shape.”   Charles Dickens, Great Expectations


World economy

The global economy has not shown such good statistics in a long time.

The United States has been performing well for some time despite disappointing recent expectations. The US Central Bank (FED) indicates that economic improvement continues and economic activity is growing at a moderate pace. Job growth has recently been slightly lower compared to the end of 2016, but unemployment is decreasing and is already at a very low level. Household spending is growing steadily and companies are investing.

Until the end of last year, there was little improvement in Europe. The recent summary of the European Central Bank now gives a more positive picture: The economy is growing by 2.4%, unemployment is high, but decreases, inflation is 1.4%, loans from banks to companies started to show growth and survey data also indicate growth for the coming period. The purchasing manager's sentiment (PMI) in the different Euro Area countries is more positive and the local differences are getting smaller. The political risks listed at the beginning of this year have been reduced, Brexit negotiations by the weakened British Parliament and the Italian elections remain potential obstacles.

Emerging markets are also performing well. Asia is strengthened by the robust figures from China. However, the concerns about capital flight from China in early 2016 remain present, and the decline in foreign currency reserves from that period has not been restored. Nevertheless, we remain in the view that the government will stimulate the economy at least until the People's Party congress in October 2017.

Financial Markets

The dilemma remains that the markets show a combination of high expectations and high valuations with historically low volatility.

Profit growth expectations for companies in the world stock index for this year are on average 21%. These are high, but unlike the past four years, in which the expectations for the ongoing calendar year were revised downwards, profit forecasts are revised upwards during this year.

The stock market indices of The U.S., Germany, Switzerland, Sweden and the United Kingdom, among others, all trade at an historical high. The high valuations are due to the high profit expectations, but also the Central Bank policy. Low interest rates boost the valuation and are also good for profitability of companies. Inflation is an important factor for the policies of central banks of Europe and the US. With low inflation, the possibility for ongoing stimulus from Central Banks is higher. We have lowered our inflation forecast. Due to structural changes, such as more productivity from technology, aging population and expected longer-term low oil prices, the likelihood of inflation well above the 2% policy goal is low. Short interest rates may increase and has already been raised in the US, but the 3% neutral level, that the FED aims to attain, seems to be very far out of sight. Inflation in the western world is now between 1.4% and 1.7%. With such inflation rates, ten year bond yield compensation of 3% would be appropriate. Because the actual interest rate is still far below that, we are reluctant to invest in long maturities in low-risk bonds and we prefer corporate bonds and floating rate bonds. For this reason, we remain positive about real estate stocks that should perform well in a low interest rate environment. The interest rate also gives confidence to remain invested in equity despite high valuation.

The volatility that is priced in the market has rarely been so low in the past ten years. Investors foresee few problems and risk sentiment is positive. This is a source of concern because sentiment could turn.

Asset Allocation

We maintain the slight overweight in equity. The relative valuation of different asset classes is still in favour of equity and high valuations can be maintained. Within bonds a part of the portfolio is invested in short US Dollar bonds. Furthermore interest rate risk is higher in Euro denominated bonds for those bonds where we still see attractive risk return metrics. In order to benefit from the strong economy, the portfolio has an allocation to the credit risk of corporate bonds too. The high allocation to cash is maintained because the interest rate is relatively attractive compared to short, low credit risk bonds. Real estate has a neutral allocation. The allocation in gold is maintained, partly as insurance against persistent political risks and a possible increase in volatility. The diversification away from Euro into fundamentally strong currencies will also be maintained. This led to currency losses in the first half of the year, but interest rates are higher in several other currencies. The large interest rate differential in US Dollar against Euro should strengthen the US dollar. Furthermore, the US Dollar remains a safe-haven in case the positive risk sentiment turns. Portfolios remain overweight in US Dollar, Swedish and Norwegian Krone, Singapore Dollar and Swiss Franc.



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.