Investment Outlook

Investment Outlook first quarter 2020



"We should be happier to have a job than to have our savings protected" - ECB President Christine Lagarde, November 2019

World economy

Our investment portfolios ended 2019 well. During the last quarter the equity positions had the strongest. Markets were supported by the announcement of a phase one trade deal between China and the US. Except for the fact that new US trade tariffs, originally planned for December, haven’t been imposed and China’s stated intention to buy more US soy beans, the deal lacks substance. Beside the trade deal optimism, markets have also more or less ignored the impeachment proceedings in the US, primarily because the impeachment is not very likely to be supported by the US Senate.

The biggest surprise of 2019 was the policy change made by the central banks. The US Federal Reserve (Fed) cut interest rates for the second time in October by 0.25% to 1.50%-1,75%. These cuts were made despite the fact that core inflation in the US has consistently topped 2.0% since the beginning of 2018. With the US presidential elections coming up, we do not expect any further steps by the Fed before then. Christine Lagarde, appointed as the new president of the European Central Bank (ECB) in November, has made it clear from the start that she supports the interest rate policy of her predecessor, as is clear from the quote on the top right of this page. At the same time, she is increasing the pressure on member states with a budget surplus, such as Germany and the Netherlands, to actively use that surplus for fiscal stimulus. Another possible instrument would be to offer different deposit and debit rates in order to stimulate certain lending. Finally, policy is being considered to make climate part of the ECB objectives.

Inflation levels, consistently low despite ten years of expansionary monetary policies, seem to make markets trust in lower interest rates for longer. During the past years, it appears we have only seen inflation in sectors where supply is limited. Healthcare and education in the US have become more expensive, as have concert and theme park tickets. Stocks, bonds and real estate all showed strong gains last year. But in sectors like energy and food, supply has increased strongly because of technological advances and cheap financing. As a result, prices in these sectors have declined significantly. The shale oil revolution is an example in point; this industry has been spending more money than it earns for years. Without low interest rates and a high volume of available financing seeking returns, the sector would most likely not have had the opportunity to continue to develop its technology and supply the market with cheap oil. This impact of expansionary monetary policy, where the resulting increase in supply also has a deflationary effect, is often overlooked.

The question is whether the deflationary powers of the previous years are turning around. The energy sector, the worst performing sector in 2018 and 2019, is facing increasing scrutiny of its environmental impact and seems to be struggling to retain access to capital markets. It is possible that some sectors could move from a supply surplus to a shortage. In addition, wage inflation in the US is over 3% with unemployment at 3.5%, the lowest unemployment figure in 50 years. Finally, reverse globalization movements such as Brexit and trade wars should also have an inflationary effect. However, markets do not seem to factor in a higher inflation scenario. Therefore, we will be largely avoiding interest rate sensitive bonds, as well as equities that are closely correlated to them.

OPEC announced in December that is was cutting its production quotas by 400 thousand barrels a day. The cut was meant to support the price of crude for the IPO of Saudi oil company Aramco the same month and is in itself not expected to have a significant effect on the oil markets. Saudi Arabia was already producing less than its allotted share and production can be ramped up quickly when prices increase.

Liquidities and bonds – the underweight duration and lower interest sensitivity of the fixed income allocation of our portfolios contributed positively to the performance during the last quarter. Low nominal interest rates and negative real interest rates in much of the Euro area mean fixed income investments remain unattractive. Incidentally we are able to identify an attractive bond, but credit or currency risks are usually involved. Under current market conditions, we are more inclined to allocate our risk budget to equity. The current positioning with a relatively high allocation to cash versus bonds is maintained for the moment.

Equity – With a return of over 30% in 2019, our equity positions performed well. Because company profits hardly grew on average during the same period, it is clear that current stock prices are high. Many companies are cleverly using their high stock prices to their advantage by issuing new shares. But as described in our previous outlooks, there are big differences to be found between the valuations of individual companies. Our research continues to allow us to identify attractive investments. Nevertheless, the high overall valuations and challenging profit forecasts in an environment of low growth, make us maintain no more than a neutral weight for equities in our asset allocation.

Listed private equity managers – The best performing asset class of 2019 with gains of almost 50%. We remain optimistic about the inflow of capital in the sector and maintained our positions in private equity managers EQT and Partners Group. We lowered our position in private equity manager Brookfield during the last quarter, due to the relatively high level of debt in their investments.

Real estate – We remain cautious with certain sectors within real estate. Residential properties in Miami and New York seem to have peaked. Our positions in Singapore real estate benefited from recent capital flight from Hong Kong

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



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.