Investment Outlook

Investment Outlook fourth quarter 2019



President Trump on Twitter after the strike on the Saudi oil refinery 2019

World economy

The US and China have not come closer to resolving their trade conflict during the last quarter. The trade tensions, combined with disappointing macro-economic figures from Germany in particular, caused volatility on worldwide equity markets and lower interest rates. In the US, 10-year treasuries fell from 2.0% to a low of 1.45%. In Germany, the 10-year bund rate fell as low as minus 0.7%. Despite this, markets continue to trade around their recent highs. The difference in valuations between growth and value stocks has reached its highest point since 2000, during the run up to the dotcom bubble.

The US Federal Reserve Board (FED) reacted to weaker economic indicators with a two-step interest rate cut totaling 0.50%. It is important to note that the FED was not unanimous in reaching this decision. The primary objections being that US inflation is currently at 1.7% and that low unemployment has lifted wage inflation to over 5%. The latter clearly resulting in lower profit margins for labor-intensive industries, such as retail companies.

The US deficit remains high at 4%, despite the strong economic growth after the tax cuts two years ago. As a result, a large supply of US government short term debt is flooding the money market (i.e. debt with a duration up to one year), causing liquidity issues in these money markets.

The European Central Bank (ECB) also cut its interest rate, by 10 basis points to -0.5% and announced it will resume purchasing bond debt. Starting this November, the ECB will begin buying EUR 20 billion worth of fixed income per month. This compares to 80 billion during the most recent purchasing plan. Mario Draghi will step down as ECB president next month, his successor is Christine Lagarde.

Civil unrest continued in Hong Kong even after the planned China extradition law, which initially sparked the protests, was cancelled. This has had significant impact on the Hong Kong economy, but the impact on the rest of the world is limited. However, it seems that large volumes of capital is being moved from Hong Kong to Singapore, which should benefit our Singapore real estate positions.

Global energy markets were stunned towards the end of the third quarter by an attack on the heart of Saudi Arabia’s oil production facilities. Houthi rebels were quick to claim responsibility, but the US pointed towards Iran. Saudi Arabia was initially forced to cease half of all their production, representing 5% of global oil production. Oil prices spiked as markets panicked. Saudi Arabia has since announced that it expects production to be back to normal by November and will draw from their reserves until that time to meet their supply commitments. Possible retaliations or complications and longer timelines during the repairs threaten current oil prices. The fuel-dependent US reacted swiftly to the incident by announcing they would make their strategic oil reserves available.

Looking forward, we expect the US presidential election to dominate next year’s global economic developments. Several polls suggest Elizabeth Warren is the new Democratic Party front-runner. Barring political ideology, president Trump has always measured his success by the level of the Dow Jones Index and has gone to great lengths to elevate stock prices. The president’s reaction on Twitter to spiking oil prices after the attack in Saudi Arabia, quoted above, was characteristic. Elizabeth Warren is significantly less pro-business, which could turn out to influence market sentiments negatively. In addition, the medical and health care sectors traditionally face pressure during US presidential campaigning. So while we have assessed that there is presently value to be found in certain pharmaceutical stocks, we are reserved about acting on those estimates at the moment.


Liquidities and bonds – falling interest rates caused performance to lag versus the bench mark because of an underweight in duration and allocation of part of the fixed income to cash. However, a 10-year bond paying 0% interest will yield 0% in 10 years, regardless of the rate of the note during its term. In addition, the interest curve is flat, meaning 2-year bonds pay the same interest as 10-year bonds, denying investors compensation for the increased risk of a longer duration. With no apparent upside on either yield or duration, we maintain our current positioning.

Equities – Exposure to cyclical companies with high debt was decreased further this year. We continued this trend in the third quarter by selling Randstad and Wendel. The drop in European banking equities was assessed as too sharp, resulting in a buy of ABN Amro. Japanese airconditioning producer Daikin and medical tech companies Stryker and Medtronic were bought for company specific reasons. Please refer to the next page for an in depth look.

Listed private equity managers – The overweight allocation to this asset class is maintained. We added Swedish EQT to the portfolio. This equity manager made its IPO in September. Like it’s Swiss peer Partners Group, it benefits from the continued inflow in their investment category. Investor AB, in which we are also invested, is a major EQT shareholder.

Real estate – Real estate benefits directly from the lower interest rates. The possible introduction of maximized rents in Berlin brought on hefty competition in German real estate. Our position in LEG Immobilien, primarily active in North Rhine-Westphalia, was unperturbed. Shopping centers and malls lag in performance, even though Simon Property Group and Unibail Rodamco Westfield results show they are mostly unaffected by the high number of bankruptcies in US retailing and e-commerce competition. The dividend yield of the two stocks is 5% and 8% respectively.

Precious metals – The position in gold performs well in the current environment of geopolitical risks and lower real interest rates.