Investment Outlook

Investment Outlook first quarter 2018



 “If populism is remaking capitalism, it seems so far to be a moderate recalibration.” Zanny Milton Beddoes (editor–in-chief, the economist - December 2017)

World economy

Where 2016 was characterizes by extreme results with a wave of populism, 2017 has been relatively gradual and several political events have turned out positive for financial markets. 2018 promises to become an interesting year politically. Several large (geo) political developments that are difficult to predict are ahead. The actual exit out of the Eurozone by Great Britain, the continuing threat from North Korea and the Italian elections in March 2018 are some examples. In addition, there are also possible unexpected political developments. For example, there was no particular concern about the unity of Spain around this time a year ago. It gives some degree of comfort that financial markets have processed many such developments in 2016 and 2017 well.

Our basic macroeconomic scenario remains unchanged. The world is in good shape. Very rarely, based on IMF data, are growth expectations for all the world's economies so close to each other and with recession expectation for such a few countries. Business confidence is at a high level for all major economies and consumer confidence continues to pick up. Inflation expectations remain low for the US and Europe. Low growth in business investment has kept economic growth low in recent years. If they continue to rise further 2018 could surprise positively.

In 2007, however, the consensus forecast for 2008 was also that all major economies would grow. That is why we continue to closely follow the following three risks: First of all, China remains, as has been the case for several years, a source of concern. Private, non-financial sector debt now comprises more than 200% of gross domestic product, making the economy vulnerable to falling real estate prices or lower economic growth. Secondly, the structural problems in Europe set out in previous investment outlooks continue to persist. Governments can’t get out of high debt situations through inflation due to the single currency. Finally, in our view, the main risk for 2018 is too rapid tightening of the still loose monetary policy of the central banks in the world. Most recessions have historically started due to the tightening of monetary policy and the rhetoric of the central banks in the world is moving more and more towards a stricter policy. Should a recession occur, the central banks' resources to do something about this are limited. Balances of central banks are already high due to buy-back programs and interest rates remain historically low.


Financial markets

The financial markets have been aided by monetary stimulus the last years. This stimulus is slowly being phased out. Equity valuations are at a relatively high level on a historic basis. The US equity market has been in its second longest rising period ever since 2009. Average global operating profit growth forecast for 2018 is more than 20% and the high expectations of the past year have been realized to a large extent. This gives confidence, despite the high valuation, to remain invested in equity. The volatility that is priced into the market has rarely been so low. Investors anticipate few problems and risk sentiment is positive. This is also a source of concern because this sentiment could turn around.

Inflation excluding energy and food in the western world is now between 0.9% and 1.8%. With such inflation, ten-year bond yields of 3% would be appropriate. Because the actual interest rate is still far below this, we are reluctant to look for long maturities within bonds with a low credit risk and we prefer corporate bonds and floating rate bonds.

Given the expectation that inflation will remain at a similar level, real estate equities can be a good source of additional ongoing returns in the portfolios.


Investment strategy

The investment strategy was not materially altered during the quarter. 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. The selection of individual shares is important and has resulted in good relative performance in recent years. Within bonds, part of the portfolio is invested in short maturity US dollar bonds and also includes corporate risk. 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 is maintained despite currency losses in recent months. Mainly driven by positive interest rate differentials and divergent central bank policy, we remain positive about the US Dollar. 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.