Investment Outlook | December 2017
Alert to opportunities and risks
Contents
INTRODUCTION 3 ALERT TO OPPORTUNITIES AND RISKS
4
ANIMAL SPIRITS
6
EQUITIES: POSITIVE, BUT ALERT
8
EQUITY THEMES: STRIVE FOR BALANCE
10
BONDS: WATCHING FOR OPPORTUNITIES
12
ADVANCES IN SUSTAINABLE INVESTING
14
NEW LANDSCAPE FOR PRIVATE EQUITY
15
REAL ESTATE: TEMPERED EXPECTATIONS
16
COMMODITIES: OPPOSING FORCES
17
CURRENCIES: EURO STRENGTH IN 2019
18
PERFORMANCE 20 ASSET ALLOCATION PROFILES
21
CONTRIBUTORS 22
This is an international ABNÂ AMRO publication. Risk profiles and the availability of investment products may differ by country. Your local advisor will be able to provide more information.
2
Investment Outlook | December 2017
Introduction
This Investment Outlook addresses the positioning of private clients for 2018 – a time when investors can still benefit from wellestablished trends, but should remain aware of risks. In 2018, we face a restored business cycle, which means a more dynamic environment with ups and downs. Our recommendation is to stay alert and to continue to benefit from the opportunities offered by growth, but to be ready to take profits in faster-growing sectors or in credits.
Didier Duret Chief Investment Officer, ABN AMRO Private Banking
It also means diversifying away from the exuberant crowd and favouring the industrials and consumer discretionary sectors. A balanced approach to thematic investing can also mean exposure to slower, more steady longterm trends, such as the emerging-markets consumer and demographics. Sustainability offers a new angle to approach equity and bond investing. The yields where government bonds again become attractive will likely be seen in 2018. The ultimate goal for 2018 should be to build a resilient international portfolio and to be aware that as the economic recovery matures, there is the possibility of market valuations becoming excessive. ABN AMRO Private Banking’s investment team, who are responsible for this Investment Outlook, provides more information on their recommendations in the pages that follow. Your Relationship Manager or local investment professionals stand ready to assist you to prepare for what is ahead in 2018.
Richard de Groot
Didier Duret
Richard de Groot
Global Head Investment Centre, ABN AMRO Private Banking
3
Alert to opportunities and risks The economic recovery is broad-based and on track to continue in 2018. But a stronger business cycle also means a more dynamic environment. This Outlook is a call to start 2018 by being modestly overweight in stocks, to be alert to opportunities and to use cash as a buffer against risks. Better-than-expected economic growth, prolonged low
delay central banks in hiking interest rates in the US and
inflation and stable financial conditions will support markets
eurozone.
in 2018. This environment will be positive for corporate earnings, especially for companies active in expanding markets.
XX
Equity investors in 2018 should concentrate on stock selection. Markets have already reacted
While the risk of recession in 2018 is low, the more dynamic
positively to economic acceleration and constructive
environment requires some caution. The economy is getting
financial conditions. Now it is time to find opportunities
back to normal, but high growth also implies economic fluc-
through careful stock selection within sectors, industries
tuations. These ups and downs could bring an end to the
and themes.
extended period of extremely low market volatility that we have had.
‌ But creates new challenges
In 2018, there is a risk that positive consensus views of are entering an environment where after very good returns,
A normally functioning business cycle implies economic fluctuations, which can affect earnings
investors may be tempted to chase past winners. It is a situ-
expectations. Higher inflation, for example, could trigger
ation where high expectations can become a vulnerability.
reactions from central banks and affect bond markets,
the economy and markets could foster complacency. We
XX
which are already trading at very low yields. Oddly enough, low inflation is also a risk. The prevalent shock and rising bond yields, if inflation would rise unex-
A market correction can be triggered by an escalation of risks. Known potential risks include
pectedly. This situation, however, would present the oppor-
central bank monetary policy mistakes, a sudden jump
tunity to accumulate bonds to be used as a traditional safe-
in oil prices caused by geopolitics in the Middle East, a
haven asset and for portfolio resilience.
slowdown in China, US/North Korea tensions and political
opinion that inflation will remain subdued could result in a
XX
fragmentation in Europe. New risks, such as large-scale cyber-crime, may have a low probability of occurring, but
A normal functioning economy is constructive for risky assets‌
outsized consequences. XX
XX
A strengthening business cycle
Momentum breeds complacency.
been dominated by momentum trades in growth areas,
upgrade of global growth, above the current forecast of
such as information technology. A growing number
3.9% in 2018. This additional momentum could add a
of index-based instruments and automatic trading
further boost to earnings.
programmes as well as illiquidity in bond markets could amplify market reactions.
XX
Low inflation, accommodative monetary policies and global technological innovation could prolong the global business cycle. Technology implementation fosters productivity, which keeps inflation low. This could
4
Markets have
could lead to an
Investment Outlook | December 2017
Opportunities and tactical intelligence XX
A moderate overweight in stocks.
Active strategies
Neutral
We suggest
investing in modestly pro-cyclical sectors, that can benefit
Cash
from solid growth momentum. We favour the industrials and consumer discretionary sectors, which are exposed
Equities
to an increase in consumer and investment spending. XX
consumer staples, telecom
Equity thematics contribute to portfolio diversification. Within thematic investing, we suggest finding a balance between stocks exposed to
industrials, consumer discretionary
neutral
Real estate
neutral
Commodities
neutral
Hedge funds
sustainability trends, emerging-markets consumers and innovative companies active in technologies or services that connect the world. XX
Asian emerging-markets equities and emergingmarkets bonds are both supported by the improvement
Bonds
in economic fundamentals in emerging markets and constructive financial conditions, such as stable currencies and financial inflows. XX
Higher government bond yields
-30
can support the
accumulation of safe-haven assets in preparation of a
-20
-10
investment-grade, inflation-linked, emerging markets, high-yield
10
20
30
active deviation (%) Represents absolute deviation from the benchmark created by our active investment strategy. These decisions affect all the profiles. Profile 3 (balanced) is represented here. Source: ABN AMRO Private Banking
growth slowdown later in the business cycle. In the bond portfolio, we are also entering the year with a large exposure in corporate bonds, which could be reduced if valuations become stretched. XX
Commodity markets can be used for portfolio diversification, in case of surging geopolitical risk. Growing demand is offsetting the risk of oversupply in energy and materials markets.
XX
Currencies. A limited rally in the US dollar against the euro is expected in 2018, while appreciation in the euro is expected in 2019.
Didier Duret Chief Investment Officer
5
Animal spirits The macroeconomic outlook for 2018 is positive, based on economic growth remaining above trend, inflation remaining subdued (even if it rises a little) and interest rates remaining low.
Will it continue? The question for 2018 is if this positive environment will continue. What is needed is for China not to slow too much. While it is hard to monitor exactly what is going on in the
The investment environment has been nothing short of
Chinese economy and what the policymakers are aiming for,
incredible in 2017. Global growth is exceeding expectations,
we see no reason why the Chinese economy would slow
with all regions contributing. At the same time, inflation has
excessively. Bear in mind that China is on a path of gradually
remained low in key economies; central banks have been
slower growth. The biggest risk is that policymakers, in their
cautious; there have not been any disruptions in financial
efforts to deal with an alleged credit bubble, step too hard
markets and geopolitics have not had a lasting negative
on the brakes by squeezing credit. Again, we see no good
impact.
arguments why Chinese policymakers would do that.
It is as good as it gets and represents a solid base to foster economic activity in 2018. It is reinforced by the market’s
An acceleration of corporate investment growth is also
reaction to positive ‘animal spirits,’ which economist J. M.
needed at this stage of the business cycle. Various signals
Keynes, describes as the willingness of entrepreneurs to
suggest that such an acceleration has started and will be
invest based on a positive appreciation of future demand.
sustained. Business confidence surveys (see Figure) show that businesses are planning to materially increase their
Where does it come from?
outlays on capital expenditures. In addition, capital-goods producers are reporting very healthy order inflows.
It is a little unclear what is driving all this, however. We think
Inflation also needs to remain low for this very favourable
a number of factors should be mentioned. In our view, China
environment to continue. And, as growth has been exceed-
is the epicentre. Chinese import growth has strengthened
ing the trend line for some time, economic slack is disap-
since early 2016, and this strength is continuing. The recov-
pearing, which increases the risk of inflation. In addition, the
ery in oil prices has also put a stop to the collapse of invest-
continued rise in oil prices is also set to push inflation higher.
ment spending in the capital-intensive energy sector, and low interest rates and the ample availability of credit have
Nonetheless, we are confident that strong disinflationary
also been very supportive.
forces will prevent inflation from rising very significantly. Technology will continue to put a lid on inflation, as business
On the inflation side, surprisingly low core inflation in the
models will continue to be disrupted. Perhaps even more
US in particular has probably been due to technology chang-
important in 2018 is that considerably stronger corporate
ing the inflation dynamics. This has disrupted existing busi-
investment is bound to provide further support to productiv-
ness models in a range of industries, including the services
ity growth.
sector. In addition, US productivity growth is picking up and depressing unit-labour costs.
Inflation in the eurozone is likely to rise by only a little. Many European countries still have significant excess capacity. This will continue to prevent any sharp rise of eurozone inflation in 2018.
6
Central banks need to be cautious and disruptions in finan-
Further, US President Donald Trump promised tax cuts and
cial markets need to remain absent. The latter is very hard
infrastructure spending in his election campaign. He has
to predict. Central bank behaviour is easier to assess. We
delivered neither, so far. It now looks as though tax reform
expect that central banks will remain cautious and will
is coming soon. This would provide a modest acceleration
respond to any adverse development in financial markets
to US growth.
and the real economy. Han de Jong Chief Economist
Confidence in the manufacturing sector has risen in the US and Europe 70
US ISM (lhs)
German Ifo (rhs)
120
Forecasts: Economic growth and inflation (%)1 28 November 2017 Real GDP growth 2018
110
60
100
50
90
40
80
30 2000
2004
2008
2012
2016
Source: Bloomberg As measured by the German Ifo Business Climate survey and the US Institute of Supply Management survey. For the ISM Index, a reading of greater than 50 signals increased economic activity, less than 50 indicates a contraction and 50 corresponds to no change. For the Ifo Index, January 1, 2005 = 100.
Inflation 2018
ABN
Market
ABN
Market
AMRO
view
AMRO
view
US
2.7
2.5
2.3
2.1
Eurozone
2.5
1.9
1.7
1.3
UK
1.4
1.4
2.3
2.6
Japan
1.7
1.3
1.0
0.7
Other countries*
2.3
2.3
1.9
1.8
EM Asia
6.1
6.1
3.0
2.8
Latin America
2.2
2.2
4.8
5.2
Emerging Europe
3.0
2.8
5.5
4.8
World
3.9
-
3.3
-
1 All forecasts are year averages. The regions’ weights are based on PPP exchange rates. *Other developed countries are Australia, Canada, Denmark, New Zealand, Norway, Sweden and Switzerland. Source: ABN AMRO Group Economics, Consensus Economics, EIU
7
Equities: positive, but alert The outlook for 2018 is reasonably positive for equity investors. Stock markets are expected to continue to be buoyed by strong economic growth, increased investment spending and robust earnings. However, after a very good year for stocks in 2017, we are also alert to the possibility of a shift in the market environment.
a different market environment. After all, with already strong
The fundamental backdrop for equity markets continues to
In terms of traditional valuation metrics, equity markets look
be supportive, driven by a synchronised and broad-based
demanding. Earnings multiples are trading above historic
global upturn that has even been showing signs of further
averages. Having said that, price/earnings multiples are still
acceleration. There are also clear signs of increased invest-
at a reasonable distance from peak levels seen in previous
ment spending, which should fuel continued strong earn-
bull markets. (See Figure.) Moreover, the extremely low
ings growth. Coupled with low and only softly rising interest
interest rate environment, implying a low discount factor,
rates, this offers room for further inflows into equities.
helps explain elevated multiples.
Nonetheless, we acknowledge that further down the line
In an environment of encouraging global growth and moder-
some of the current positive forces will gradually ease, and
ate interest rate hikes, debt and leverage concerns will
we are on the alert for signals that might indicate the start of
likely stay low. This should leave further potential for equity
equity returns for a number of years, expected future returns have diminished. We therefore remain positive regarding equities, but less so.
Valuations demanding, but not at peaks
A long-term perspective of trailing price/earnings multiples versus the S&P 500 Index S&P Index 3,000
P/E 35 30
S&P Index 2,584.8
25
2,500 2,000
20 1,500 15 Price/earnings 1,000 multiple 21.8
10
500
5 0 Dec ‘86
0 Jan ‘92
Feb ‘97
Mar ‘02
Shaded areas indicate periods of prolonged equity rallies. As of 14 November 2017. Source: Bloomberg
8
Apr ’07
May ‘12
Jun ‘17
Investment Outlook | December 2017
markets to rise in line with earnings, as relative returns,
we also see pockets of opportunity in cyclical materials and
compared with other asset classes, remain attractive.
energy sectors.
At the same time, we see clear regional valuation differences, which is one of the reasons that we prefer stocks in
At the subsector level, we still believe there are interest-
emerging markets over developed markets.
ing investment pockets in the areas of software & internet security, innovative industrial applications and segments
Preferring emerging markets over developed
exposed to consumers in emerging markets. We are less impressed with the potential of the telecoms and utilities sectors, or with most areas within the consumer staples
We continue to see attractive opportunities in emerging
sector. This is because these traditionally more defensive
markets, as economic and market fundamentals continue
sectors have the tendency to underperform broader equity
to improve. This is especially true within Asia, which is our
markets during cyclical upturns.
preferred region within emerging markets, provided that China authorities do not put on the brakes. Moreover, our
Paul van Doorn
central scenario of a relatively stable US dollar, improving
Senior Portfolio Manager, Equities
commodity markets and only modestly higher US bond yields in 2018 should help support emerging markets. Benefiting from an accelerating economy and reviving earn-
Forecasts: Equity indexes Region
Position
Forward P/E 2018
ings, the European stock markets have recovered, due to accelerating growth and softening of political worries. We
Global equities
have a slight preference for Europe over the US for valua-
(MSCI World All Countries)
Overweight
15.9
tion reasons. Nonetheless, given the strong representation of the technology sector in the US, we believe the region
Developed markets
also has a strong appeal.
-US (MSCI US)
Underweight
17.9
-Europe (MSCI Europe)
Neutral
14.8
-Japan (MSCI Japan)
Neutral
14.4
Remain selective at the sector level
Emerging markets Based on the prolonged upturn in global growth, we still
- Asia (MSCI Asia ex-Japan)
Overweight
12.6
believe a pro-cyclical sector stance is most appropriate. Next
- Latin America (MSCI Latin America)
Neutral
13.9
to the wave of increasing capital expenditures and consumer
- Emerging markets EMEA
Neutral
10.6
spending, which will predominantly benefit the information technology, consumer discretionary and industrials sectors,
(MSCI Emerging Markets EMEA) Source: Bloomberg, MSCI. Data as of 24 November 2017
9
Equity themes: strive for balance After our four equity themes had a good run in 2017, we advise taking a balanced approach in 2018. This includes maintaining exposure, so as not to miss investments in fast-growing companies, while also taking profit in some stocks that have risen very quickly.
China has incorporated renewable energy and clean air goals in its new five-year plan. And the 173 countries that have signed the Paris Climate Accord remain dedicated to achieving their climate goals. Solar and wind-energy production, together with electric vehicles are expected to play a prominent role. The renewable trend can energise technologies that support and enable electric vehicles, batteries and elec-
Some of the stocks within our main equity themes doubled in
tric grid innovation.
value in 2017. This advance raises the question as to whether there is a ‘bubble.’ Despite some lofty valuations, we do not think so. The big difference with, for example, the internet bubble of the late 1990s, is that today’s valuations are supported
Connected World: digitalisation and the cloud
by strong and improving company fundamentals and earnings. The big online platforms that comprise the Connected World Nonetheless, there are risks – on both sides. Not investing
theme have had very strong returns in 2017. After some
in strong growth companies can hurt overall performance,
companies have doubled in value, it must be considered if it
while even a temporary halt in a company’s earnings growth
has happened too fast. We do not think so. Valuations may
can cause a serious setback in share price. We therefore
not be as attractive as they were at the beginning of 2017, but
advise a balanced, three-step approach to thematic equity
the acceleration in revenue growth is impressive.
investing in 2018. The big online platforms are invading and disrupting more 1. Take your investment decisions based on our thematic
and more sectors. Grocery stores, for example, are now
and sector notes. (The thematic reports and our Best
in competition with e-commerce players. Social media
Ideas lists can provide more information.)
and search platforms are taking a growing part of advertis-
2. Certain thematic stocks, such as in the IT sector, have
ing budgets, at the expense of more traditional advertising
been rising very quickly. It makes sense to temper further
agencies. The digitalisation of many services is also creat-
optimism and to take some profits now.
ing opportunities in online and cloud-based business models
3. Rebalance thematic exposure by adding stocks that are prof-
and the companies that support them. Share-price correc-
iting from ‘slow and steady’ trends, such as those that rely
tions among the big platforms, online payment providers or
on emerging-markets consumers or demographic trends.
web-services companies are therefore an opportunity for investors.
Renewables: power generation and electric vehicles
Emerging-markets consumers and demographic trends
The rise of sustainable power generation and the car industry’s focus on electric vehicles have set the stage for growth
Some companies are driven by technology trends and others
in technology related to renewable power and batteries.
benefit more from demographic trends. The size of the high-
Although the US is reducing tax incentives in this area, the
spending Chinese middle class is expected to double in the
trend towards a more sustainable world is still strong else-
coming ten years. At the same time, the world population is
where. Environmental initiatives are even accelerating.
ageing. The number of people aged 65 and over is the fastest
10
Investment Outlook | December 2017
growing population group. This is true, not only in the US and
the growing use of sensors, robots, automation and cyber-
Europe, but also in many emerging-markets countries. This
security. These innovations can lower maintenance costs,
creates demand in the short term for travel and luxury goods.
be used to optimise production and efficiently respond to
It also has a positive impact on products and services to stay
changing demand. The Interconnected Factory is an equity
fit, eat healthily and to be an eco-friendly consumer. In the
thematic that will likely become even more relevant in 2018.
longer term, there is an increase in the need for health care Piet Schimmel
services, senior homes and other senior-related services.
Senior Equity Thematic Expert
Interconnected Factory: now powering up Our most recently launched theme is the Interconnected Factory, based on the industrial internet of things. This trend is increasingly seen in the manufacturing sector, with
Structural forces are transforming companies all around the world, influencing revenues, margins, profits and investment results. Social media E-commerce Cloud computing Data centres
C
on
su
ct
g
Luxury goods Travel Healthy, eco-friendly food Age-related services
ed
gin
Fa c
E m er
tor y
&
gy Transition C r e on En n
ld Wor ted ec
Renew ab les
Electric vehicles Batteries Electric grid
me
o r Th e I n t e r c
n
ne
Sensors Robots Semiconductors Cyber-security
Source: ABN AMRO Private Banking
11
Bonds: watching for opportunities Bonds have more to offer in 2018 than might be expected, given their low yields. While investors watch for bond yields to rise and for bonds to become attractive again, the bond portfolio offers opportunities for international diversification, insurance against inflation and sustainable investing.
for US Treasuries than for core eurozone bonds, given that the US is ahead of Europe in the business cycle. The yield difference between the US and Europe has widened, but will narrow, as yields in the US will peak earlier. (See Figure.) Despite a punishing cost of close to 2% on an annual basis to hedge US-dollar exposure back to euros, US Treasuries will, at their near-peak yields, offer an attractive counterbalance to equity risk. As an indicator, we expect ten-year
As the economy and interest rates return to normal, a shift
Treasury yields to peak in 2018 at just below 3%.
from credit risk towards interest-rate risk will be a strong theme for bond portfolios in 2018. It will be a delicate
Timing the re-entry into core government bonds is key to
balancing act, given that yields are still very low. Luckily,
safeguarding future performance. In Europe, it may well be
central banks are still dominating bond markets and will be
later than 2018 before these yields are at a level where they
careful to avoid a recession. Our main scenario is therefore
offer returns better than cash. But, as the ECB is tapering
for a controlled and gradual path back to more normal inter-
their quantitative easing (which has been supporting corpo-
est rates and monetary policies.
rate bond markets), investors are well advised, in due time,
Government bonds will, at some point, become attractive again There is no getting around rising interest rates. This is chal-
to take-profits on the credit risk that comes from holding corporate and high-yield bonds.
Diversifying the bond portfolio
lenging for bonds, and we therefore enter the year with a cautious approach to bond markets. If, and not before, yields
Emerging-markets bonds and certain segments of the US
move higher, there will come a level when core government
bond market are attractive and can be used by investors to
bonds are again attractive. This moment will come sooner
diversify bond portfolios. We have already advised investors
12
Investment Outlook | December 2017
to buy US high-yield bonds and senior loans. We expect that
a cheap form of insurance for the alternative scenario of a
a good moment will likely occur to buy US mortgage-backed
sharp rise in inflation.
securities too. International diversification of bond portfolios will continue to pay-off in 2018.
Supporting sustainability goals
Protection from inflation
Bonds can also play their part in an investor’s sustainable investing ambitions. More and more socially responsible
Inflation-linked bonds (ILBs) are also still worth having in
bond fund solutions have become available. There is also the
a bond portfolio, as they can protect against the risk of a
green bond market, where the bonds fund environmental- or
surprise increase in inflation. Such a surprise would force
climate-change related projects. Formerly a niche market, it
central banks to tighten monetary policy, slow the economy
is now an area experiencing rapid growth. We expect green
and upset financial markets. This is not our main scenario,
bonds to comprise a growing proportion of investor portfo-
but, at the same time, almost everyone counts on central
lios in 2018.
banks to set their monetary policies precisely right. The reality is that we are still in the midst of a significant mone-
Mary Pieterse-Bloem
tary experiment, and central banks may not get it 100%
Global Head Fixed Income
right. With inflation expectations for ILBs still priced below the central bank’s 2%-inflation objective, these bonds are
Difference in bond yields between the US and Europe is wide, but will narrow % 3.0
US 10-year Treasury yield
2.5 2.0 1.5 1.0 German 10-year Bund yield 0.5 0.0 -0.5 Jan '15 May '15 Sep '15
Jan '16
May '16 Sep '16
Jan '17 May '17 Sep '17
Source: Bloomberg, ABN AMRO Private Banking
13
Advances in sustainable investing Sustainable investing is growing, as awareness increases over how it can enrich investor portfolios. Impact investing and green bonds, in particular, are attracting attention and assets.
Impact investing: allocating capital differently
Swedbank AB, a large Swedish lender, for example, recently announced plans to regularly tap the green bond market. It sold its first EUR 500-million five-year green bond in 2017. The bank sees potential in using the proceeds to fund not only Swedish mortgages, but also renewable energy, including wind, solar and small-scale hydro energy, waste management, sustainable forestry, public transport and low-carbon vehicles.
European impact funds are currently managing around EUR 100 billion in assets1. Impact investing targets businesses, organisations and investment funds with the potential to
From niche to norm
generate a financial return, while also making a measurable and positive contribution to society or the environment.
We have found that investors are increasingly receptive to including sustainable investments in their portfolios. Of
For many investors, impact investing is an attractive option,
course, there are still a number of hurdles to overcome
given the two-prong goal of both investment return and
before it becomes mainstream. There is, for example, a
social responsibility. In the last few years, renewable energy
need for more clear definitions, which will facilitate compari-
and energy efficiency have been the top targets of impact
sons between different types of sustainable investments.
investment funds. The growth of impact investing recog-
This will increase accountability and enable investors to
nizes that sustainable companies are better prepared for
know exactly how it ranks in different areas of sustainabilty.
the future, and this feature is reflected in the returns they generate.
Help in these areas is underway. Moody’s, for example, is planning to incorporate environmental, social and govern-
Green bonds to finance green projects
ance issues when assessing corporate credit risk, which could help create a more level playing field. The development of green bond indexes can also help to create the
Green bonds are an important and growing subset within
transparency necessary to track the performance of sustain-
impact investing. The proceeds from green bonds are
able investments.
frequently used to finance sustainable real estate and renewable energy projects, which can reduce carbon usage. Many
We expect sustainable investing to move from being a niche
well-known European financial institutions are now issuing
to the norm over the next few years. This growth will be
green bonds. In addition to having a sustainable purpose,
boosted by its attractiveness to a new generation of inves-
they are also competitive with non-green bonds in terms of
tors, who realise that returns do not need to be sacrificed
investment return, as measured by the Bloomberg Barclays
when investing to support environmental and social goals.
MSCI Global Green Bond Index. Richard de Groot 1  The data cited in this article comes from the European SRI Study 2016, published by Eurosif.
14
Global Head Investment Centre
Investment Outlook | December 2017
New landscape for private equity Equilibrium is returning to private equity. The backlog of exits that had been postponed by the financial crisis is almost over, and, as a consequence, net distributions continue to decline. This will likely impact fundraising next year.
funds, as many LPs will find themselves no longer below, but at, their target allocation. This, in turn, could reduce the pace of fundraising, which has been at an elevated level for several years. It will also reduce the stockpile of dry powder. With the current level of dry powder, it is a compliment to
Private equity’s booming fundraising market is heading
the industry that fund managers are not rushing blindly into
for a new record year, according to financial data provider
new deals. Although deal volume could exceed USD 300
Preqin. New funds raised totaled USD 315 billion at the end
billion in 2017, according to data provider Dealogic, this is
of September 2017.
still less than half the volume invested in 2006 and 2007.
Distributions surpassed capital calls for six years
Attractive relative return Based on a positive investment environment and support-
The record fundraising has been fueled by distributions,
ive macroeconomic fundamentals, we are confident that
which have outstripped capital calls for six consecutive
private equity remains an attractive asset class compared
years. Limited partners (LPs) have recycled these proceeds
to other asset classes in terms of return expectations. We
into new commitments to maintain their targeted capital
would like to stress, however, that private equity requires
allocations to private equity. However, it seems as if we are
careful manager selection, which is the key factor for long-
nearing a turning point in terms of net distributions. With
term investment success.
distributions moderating and capital calls accelerating in the first-quarter of 2017 (latest data available), net distribu-
Our regional preferences for private equity investment in
tions have fallen meaningfully, although they remain at a
2018 continue to be funds focused on investing in North
healthy level historically. This is no surprise. The financial
America and Europe. We continue to also consider the Asia-
crisis produced a huge backlog of deals invested from 2005
Pacific, but as manager performance in this still-maturing
through 2008, that only after 2013 were ready for exit, due
region varies more widely than in any other market, we
to the less than favourable macroeconomic conditions. As
advocate focusing strictly on the handful of managers who
the pool of unrealized assets has shrunk since then, exits –
have sustained returns over different economic cycles.
and distributions to LPs – have also decreased. According to Preqin, the third quarter of 2017 was the fifth consecutive
Oliver Schebela, Head Private Equity Solutions and
quarter in which exit activity fell, helping the market to return
Andreas Hegedüsch, Sr. Investment Professional, Private Equity
to a situation of equilibrium, although with lower volumes.
Rebalancing influences new capital This rebalancing could have important consequences for future fundraising and the amount of money that has been committed to funds, but has not been invested yet (‘dry powder’). If the rebalancing continues, this will most likely mean a decline in the amount of capital pouring into new
15
Real estate: tempered expectations We have a neutral view on real estate, as cash flow growth is slowing but dividends are still attractive. Retail-focused real estate companies continue to be challenged by the expansion of e-commerce. However, as the digitalisation trend continues, we see opportunities in data centres.
Retail is being challenged, better prospects in data centres One of the largest subsectors within real estate is retail (shops and malls), which is facing challenges. Using new research methods based on tracking cell phone locations, we see a gradual decline in people visiting certain malls.
The real estate sector is still supported by solid economic
Competition from online shops is being felt in almost every
growth in the US, Europe and Asia. Rental income growth,
traditional (brick and mortar) store, as evidenced by some
however, is not as strong as in previous years. Also, in
retail chains going bankrupt. Only a few retail real estate
recent years, loans were constantly refinanced on the back
companies can withstand this negative trend. Areas that
of ever declining bond yields. As bond yields are stabilis-
stand out in this regard include retail locations in big cities
ing at low levels and credit spreads have narrowed, there is
with a lot of natural traffic.
little room left for financing costs to go lower. This results in slower cash flow growth, especially in the US, which is
Logistics-related real estate showed strong price perfor-
a dominant region in our real estate benchmark. On a posi-
mance last year, as continuing growth in e-commerce fuels
tive note, as dividends in the sector are still high, real estate
demand for distribution and logistics facilities. This subsec-
returns remain attractive compared with low-yielding bonds
tor is vulnerable, however, because there is a lot of (new)
and savings accounts.
competition in the market.
The case for real estate gets slightly better
And as the world gets increasingly connected online and data is stored ‘in the cloud,’ expansion in corporate IT server facilities is resulting in impressive growth prospects for data
Markets have clearly been positioning for growth, preferring
centre real estate companies.
cyclical equities over defensive real estate. As a result, real estate significantly underperformed equities in 2017. With
Piet Schimmel
equity multiples creeping higher, real estate valuations are
Senior Equity Thematic Expert
becoming relatively attractive. A strong rise in bond yields would pose a significant risk for real estate. However, bond yields are not expected to move substantially higher. All in all, we believe that the case for real estate is progressively improving.
16
Investment Outlook | December 2017
Commodities: opposing forces There are diverse forces affecting the broad commodities market. While we expect the commodities index to trend upward in 2018 based on strong economic fundamentals, it remains vulnerable to a range of risks.
From time to time, it is likely that the oil market will fear supply shortages. This will spur higher prices. It is now up to the Middle-East swing producers to keep oil supply in balance, as demand increases. Analysts believe that US shale oil producers will be able to increase production significantly as soon as prices nudge higher. We think that these expec-
For almost two years now, the CRB commodities index has
tations are overly optimistic. We do see some potential for
traded within relatively small ranges. It is unusual that the
US shale production to increase, but higher labour, infrastruc-
commodities market is so calm. But this feature is largely
ture and financing costs will create a burden on production
owing to its diversity. Comprising energy, agriculture, base
growth.
metals and precious metals, it appears that positive sentiment for one commodity group is being offset by the nega-
When we translate these underlying trends in commodi-
tive impact of another. As a result, the commodities index
ties markets into a 2018 outlook for the commodities index,
has been trading sideways.
we see potential for an increase, based on solid economic fundamentals. Nevertheless, this potential is coupled with
Base and precious metals diverge
high volatility and vulnerability for unexpected risks, such as geopolitical tensions, supply disruptions and adverse weather.
Looking ahead, we expect the cyclical upturn in global economic growth to continue. As a result, many base
Hans van Cleef,
metals markets appear to be heading towards a situation
Senior Energy Economist
where demand will outstrip supply. While the prospect of solid demand can push prices higher, the potential for base metal prices to rise may be limited. Prices have already appreciated, owing mainly to improved sentiment regarding the Chinese economy. Gold markets, however, have a different outlook. Given that we expect ten-year US yields to rise and for the US dollar to recover a little further, gold prices will likely be pressured in 2018.
Oil prices expected to rise
Forecasts: Commodities 20 November 2017
Spot price
Avg 2018
End 2018
Oil Brent USD/bbl
61.86
70
75
WTI USD/bbl
56.07
66
70
Metals We have revised higher our oil price forecasts for 2018 and
Gold USD/oz
1,288
1,263
1,250
2019. We expect global demand growth to remain solid and
Silver USD/oz
17.08
16.5
16
for oil prices to rise. The market has found an equilibrium
Platinum USD/oz
936.77
913
900
between supply and demand. This balance was reached
Palladium USD/oz
994.25
950
900
after several years of oversupply, but it is extremely fragile.
Aluminium USD/t
2,104
2,085
2,175
Any signal that disturbs the equilibrium, will directly impact
Copper USD/t
6,777
6,630
6,965
oil prices.
Source: ABN AMRO Group Economics
17
Currencies: euro strength in 2019 After a rally in 2017, we believe that the euro versus the dollar could come under pressure in 2018. It may strengthen again in 2019, as the ECB begins hiking rates.
forecast to rise more than US Treasury yields. In addition, in 2019, the market will probably focus on the prospect of ECB hikes in the deposit rate and this should support the euro. In 2019, we expect two 10-basis-point rate hikes in the deposit rates to -0.20%. Moreover, financial markets will
In 2017, it took some time before investors were convinced
probably also increase eurozone rate hike expectations for
that the euro would rally. We changed our view well before
2020. This could also support the euro. A continuation of
others. Now, investors are convinced that euro strength has
Fed rate increases will probably initially limit weakness in
further to go. While we once belonged to this camp, our
the US dollar in 2019. But, once investors start to anticipate
view has changed. We think that the euro versus the US
the end of the Fed rate hike cycle, the US dollar will probably
dollar (EUR/USD) will strengthen in 2019, not in 2018.
fall considerably.
Market conviction in a strengthening euro is visible in the
Georgette Boele
behaviour of the euro (it does not want to move lower) and
Senior FX Strategist
with the persistence of excessive net-long euro positions (see Figure). We think that the conviction of investors who believe in a higher euro will be tested in 2018. As long as investors are convinced that the euro will rise in 2018, it is unlikely to happen. This is because they are already positioned for it and there is a lack of new buyers. There first needs to be some kind of wash out of net-euro long positions, which will give the euro the prospect of another leg up. There are more fundamental reasons why we think that 2018 is not the year for a higher EUR/USD. First, we expect that the US Federal Reserve will continue to tighten its monetary policy in 2018. This should support the US dollar. It could,
Excessive net-long euro positions number of contracts 200,000
however, be only a modest support, as seen in 2017. We expect two 25-basis point rate hikes by the Fed, but finan-
net long positions
100,000
cial markets are only pricing-in one. Second, we think that US growth may be stronger than eurozone growth in 2018. All in all, the EUR/USD will probably come under some pressure in 2018, but we expect it to strengthen as we move
0
into 2019.
-100,000
The return of euro strength in 2019
-200,000
By 2019, the EUR/USD will have had the time to reset to a new equilibrium, as central bankers will likely take their time
net short positions -300,000 2001
2005
2009
when modifying monetary policies. We expect EUR/USD
Non-commercial net positioning in number of contracts
to strengthen again in 2019, as German Bund yields are
Source: CFTC, Chicago Mercantile Exchange, Bloomberg
18
2013
2017
Investment Outlook | December 2017
Currencies forecasts FX pair
Spot 24 Nov 2017
Q4 2018
FX pair
Spot 24 Nov 2017
Q4 2018
EUR/USD
1.1908
1.15
USD/CAD
1.2715
1.28
USD/JPY
111.41
115
EUR/CAD
1.5142
1.47
EUR/JPY
132.67
132
USD/SEK
8.2847
8.09
GBP/USD
1.3344
1.35
EUR/SEK
9.8656
9.30
EUR/GBP
0.8924
0.85
EUR/NOK
9.6712
9.20
USD/CHF
0.9798
1.02
USD/NOK
8.1215
8.00
EUR/CHF
1.1668
1.17
EUR/DKK
7.4422
7.44
AUD/USD
0.7621
0.75
USD/CNY
6.6000
6.65
EUR/AUD
1.5626
1.53
EUR/PLN
4.2112
4.10
NZD/USD
0.6884
0.68
USD/BRL
3.2300
3.30
EUR/NZD
1.7298
1.70
Source: ABN AMRO Group Economics
19
Performance
Annualised performance (%)
Tactical asset allocation versus the strategic asset allocation EUR 22 May 2003 to 31 Oct. 2017* Strategic Tactical
Excess
USD 2017 YTD (31 Oct. 2017)
Strategic Tactical
Return
22 May 2003 to 31 Oct. 2017*
2017 YTD (31 Oct. 2017)
Excess Strategic Tactical
Excess Strategic Tactical
Excess
Return
Return
Return
Profile 1
4.08
4.22
0.13
0.80
0.85
0.04
3.50
4.28
0.76
1.53
2.55
1.01
Profile 2
4.65
5.13
0.46
1.78
2.68
0.89
4.21
5.10
0.85
4.18
6.58
2.30
Profile 3
5.73
6.71
0.93
3.16
4.28
1.09
5.56
6.68
1.07
6.83
9.62
2.61
Profile 4
6.43
7.39
0.90
5.02
6.20
1.12
6.42
7.37
0.89
10.46
13.07
2.36
Profile 5
7.35
8.48
1.06
6.89
7.93
0.97
7.45
8.47
0.95
14.20
16.18
1.73
Profile 6
7.86
8.84
0.91
8.31
8.97
0.61
8.07
8.87
0.74
17.07
17.88
0.70
*Profiles 1 and 2 are linked to the “old” Conservative profile, profiles 3 and 4 to the “old” Balanced profile and profiles 5 and 6 to the “old” Growth profile.
20
Investment Outlook | December 2017
Asset allocation profiles ABN AMRO’s Global Investment Committee model portfolio risk profiles in percent, starting with the most conservative (Profile 1) and ending with that most exposed to market risks (Profile 6). Asset allocation
Profile 1 Strategic Neutral Min.
Money markets
Profile 2 Tactical
Deviation
Max.
Strategic Neutral
5
0
60
40
35
Min.
Tactical
Deviation
Max.
5
0
70
28
23
90
40
100
55
-35
70
30
85
43
-27
Equities
0
0
10
0
0
15
0
30
19
4
Alternative investments
5
0
10
5
0
10
0
20
10
0
Bonds
Funds of hedge funds
5
5
0
5
5
0
Real estate
0
0
0
3
3
0
Commodities
0
0
0
2
2
0
Total Exposure
100
100
Asset allocation
100
100
Profile 3 Strategic Neutral Min.
Profile 4 Tactical
Deviation
Max.
Strategic Neutral
Min.
Tactical
Deviation
Max.
5
0
70
21
16
5
0
70
13
8
Bonds
55
20
70
34
-21
35
10
55
22
-13
Equities
30
10
50
35
5
50
20
70
55
5
Alternative investments
10
0
20
10
0
10
0
30
10
0
Money markets
Funds of hedge funds
5
5
0
5
5
0
Real estate
3
3
0
3
3
0
Commodities
2
2
0
2
2
0
Total Exposure
100
100
Asset allocation
100
100
Profile 5 Strategic Neutral Min.
Profile 6 Tactical
Deviation
Max.
Strategic Neutral
Min.
Tactical
Deviation
Max.
5
0
70
4
-1
5
0
60
5
0
Bonds
15
0
40
11
-4
0
0
25
0
0
Equities
70
30
90
75
5
85
40
100
87
2
Alternative investments
10
0
30
10
0
10
0
30
8
-2
Money markets
Funds of hedge funds
5
5
0
5
5
0
Real estate
3
3
0
3
3
0
Commodities
2
2
0
2
0
-2
Total Exposure
100
100
100
100
The tactical asset allocation reflects active strategies that account for medium- and short-term views and represents a deviation from the longer-term strategic asset allocation.
21
Contributors ABN AMRO Global Investment Committee Richard de Groot
richard.de.groot@nl.abnamro.com
Global Head Investment Centre
Didier Duret
didier.duret@nl.abnamro.com
Chief Investment Officer Private Banking
Gerben Jorritsma
gerben.jorritsma@nl.abnamro.com
Member, Global Investment Committee
Han de Jong
han.de.jong@nl.abnamro.com
Chief Economist
Olivier Raingeard
olivier.raingeard@fr.abnamro.com
Head Investments Private Clients Neuflize OBC
Mary Pieterse-Bloem
mary.pieterse-bloem@nl.abnamro.com
Global Head Fixed Income
Georgette Boele
georgette.boele@nl.abnamro.com
Senior FX Strategist
Hans van Cleef
hans.van.cleef@nl.abnamro.com
Senior Energy Economist
Annemijn Fokkelman
annemijn.fokkelman@nl.abnamro.com
Global Head Equity
Eva Boukobza
eva.boukobza@fr.abnamro.com
Senior Portfolio Manager, Equities
Christophe Breard
christophe.breard@fr.abnamro.com
Senior Portfolio Manager, Equities
Paul van Doorn
paul.van.doorn@nl.abnamro.com
Senior Portfolio Manager, Equities
Bastian Ernst
bastian.ernst@nl.abnamro.com
Portfolio Manager, Equities
Maurits Heldring
maurits.heldring@nl.abnamro.com
Equity Research & Advisory Expert
Rainer Kloppert
rainer.kloppert@de.abnamro.com
Senior Portfolio Manager, Equities
Eric Lafrenière
eric.lafreniere@fr.abnamro.com
Senior Portfolio Manager, Equities
Esther van Munster
esther.van.munster@nl.abnamro.com
Senior Portfolio Manager, Equities
Jaap Rijnders
jaap.rijnders@nl.abnamro.com
Equity Research & Advisory Expert
Sandra Saidi
sandra.saidi@fr.abnamro.com
Senior Portfolio Manager, Equities
Piet Schimmel
piet.schimmel@nl.abnamro.com
Senior Equity Thematic Expert
Martien Schrama
martien.schrama@nl.abnamro.com
Profile Manager
Chris Verzijl
chris.verzijl@nl.abnamro.com
Portfolio Manager, Equities
Roel Barnhoorn
roel.barnhoorn@nl.abnamro.com
Senior Fixed Income Thematic Expert
Willem Bouwman
willem.bouwman@nl.abnamro.com
Fixed Income Portfolio Manager
Chris Huys
chris.huys@nl.abnamro.com
Senior Fixed Income Portfolio Manager
Fidel Kadikci
fidel.kadikci@de.abnamro.com
Senior Fixed Income Portfolio Manager
Torben Kruhmann
torben.kruhmann@de.abnamro.com
Junior Fixed Income Portfolio Manager
Jacques Verdier
jacques.verdier@fr.abnamro.com
Senior Fixed Income Portfolio Manager
Oliver Schebela
oliver.schebela@bethmann.de
Head Private Equity Solutions
Andreas HegedĂźsch
andreas.hegeduesch@bethmann.de
Senior Investment Professional, Private Equity
Group Economics
Global Investment Centre
Private Equity
Quantitative Analysis and Risk Management Paul Groenewoud
paul.groenewoud@nl.abnamro.com
Quant Risk Specialist
Linus Nilsson
linus.nilsson@nl.abnamro.com
Investment Risk Specialist
22
Investment Outlook | December 2017
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23
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