exploring new facets
Investment Outlook June 2016
Contents
LOOKING BEYOND CONSENSUS VIEWS
1
EXPLORING NEW FACETS
2
RESILIENCE AMID POLITICAL RISKS
4
EQUITIES: FOCUS ON INCOME
6
BONDS: BALANCING SAFETY AND RETURN
8
SHARP TURNAROUND IN COMMODITIES
10
THE DOLLAR RALLY IS OVER
11
HEDGE FUNDS
12
PROPERTY 12 AMPLE CAPITAL FOR PRIVATE EQUITY
13
PERFORMANCE: RECOVERY AFTER SELL OFF
14
ASSET ALLOCATION PROFILES
15
CONTRIBUTORS 16
This is an international ABN AMRO publication. Risk profiles and the availability of investment products may differ by country. Your local advisor will be able to provide more information.
Looking beyond consensus views
It is time to look at the world differently. Time to explore new facets of asset risk and return -- beyond consensus compromises. Opinions shared by a crowd can give a false sense of comfort. And, for investors, consensus can be misleading, simply because markets look forward and move faster than opinion makers. Economists shifted as one at the start of the year to lower their expectations towards a soft and uninspiring consensus. But the real story may not lie in a number, but instead in the idea that economic forecasts have become less relevant, given that markets have over relied on monetary policy to stimulate growth and calm volatility. Our view differs from consensus by considering that the world economy may have reached a point where central banks cannot compensate for the lack of political energy to promote structural changes, defeat nationalistic tendencies and free new sources of growth. This view has practical consequences. Negative yields on fixed income instruments require a new approach to generate income and capital gains for the future. And, political changes, including the UK Brexit referendum, US presidential elections and elections in other major countries, will most likely give birth to a new policy order. While this changing political landscape brings new ideas and new risks, it will affect the bond market and alter the search for sources of return. This implies finding the right mix between high-quality and high-yield bonds.
Didier Duret Chief Investment Officer, ABN AMRO Private Banking June 2016
Within equities (overweight), the stakes have also been raised. We retain our preference for defensive-growth companies. Given the potential for political and geopolitical changes, a wide geographical diversification can diffuse risk. Finally, we believe that rising commodity prices will lead to higher headline inflation in the coming months. This will create a risk for bonds (underweight) and justifies exposure to real assets, such as commodities (overweight) and real estate (neutral). 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 the rest of 2016.
1
Exploring New Facets
Exploring new facets After a sharp correction and recovery of risky assets during the first quarter, macroeconomic views and investment ideas have converged toward a muted recovery and lower future returns. Economists and analysts have reduced their expectations. Volatility has also declined, but unexpected events could lead it to bounce back.
2 “Exploring new facets of risk mitigation and return, beyond the consensus view�
Consensus opinions are firm for known risks, such as the UK referendum on staying in the European Union and the remarkable change of tone in the run-up to the US presidential elections. Volatility and investment opportunities, however, may not come from the events themselves, but from a new policy order triggered by political changes. These open issues can lead to short-term uncertainty, making income-generating assets and real assets attractive. Currencies may become more volatile, as due to their liquidity, they are the first shock-absorbers of unanticipated events. A perspective on the current complexities that is limited to the consensus view will likely miss capturing the risk premiums that will be the basis for future returns. Investing for the rest of 2016 should strike a new balance among three investment goals: XXGuarding
against the risk of higher inflation when bond yields are mostly negative in real
terms. XXCapturing
the risk premiums present in high-yield bonds and equities, with a focus on defen-
sive growth stocks. XXSeeking
international diversification to mitigate the risks associated with low growth.
CONFRONTING THE CONSENSUS TRENDS XXFuture
growth will depend on a more balanced policy mix, with less reliance on mone-
tary policy and more effective fiscal policy measures. The consensus expectation for slow, trend-like economic growth of 2% in the US and 1.5% in the eurozone is dominating markets. Only China has been able to mobilise both monetary and fiscal policies to maintain growth at a level of 6.5%-7%, which will progressively lift emerging economies and global trade. XXThe
oversensitivity of financial markets to fear and risks will persist and can lead to ignor-
ing the value and risk premiums that are available. This vulnerability is a result of the slow pace of economic growth and risk aversion. As a result, equity markets are in a wait-and-see mode and US Treasuries and Bunds are vulnerable to policy changes and rising inflation. XXGeopolitical
risks related to Brexit, the EU institutional crisis and the US presidential
elections are known risks and largely discounted. The populistic campaigning in the US, UK and other countries will be moderated by the various checks and balances that are inherent to democratic systems.
CHALLENGES TO BUILDING AN EFFECTIVE MIX XXThe
overdependence on monetary policy is creating lasting side-effects, such as negative
yields on high-quality bonds, risks to pension schemes, a change in savings behaviour and a misallocation of capital. Rising inflation, due to higher commodity prices, could prove to be a new problem for central banks, given the recurring risk of higher interest rates in the US.
Investment Outlook June 2016
XXNationalistic
policies that are driven by self-interest and conservatism could postpone
significant supply-side reforms and infrastructure spending, limiting the potential for economic growth. XXAccelerated
changes due to disruptive innovations, regulations, migration and climate
3
change require a new vision for fiscal policy.
OPPORTUNITIES DERIVED FROM THE REWARD OFFERED BY RISK XXAccumulate
financial assets close to real assets to hedge inflation, such as commodities,
inflation-linked bonds and real estate. Private equity may be of interest to qualified investors. XXCapture
the equity-risk premium: The best value for the long term rests with defensive
growth equities in the information technology, health care and telecom sectors, while avoiding the financials and utilities sectors. Low-volatility and quality strategies can be used to buffer equity exposure. XXEuropean
high-yield bonds are more attractive than emerging-markets bonds.
XXInternational
government bond exposure, where duration is managed actively and hedged
in base currencies adds both diversification and protection. XXCultivate
tactical agility and international diversification. The potential for volatility to
erupt calls for a cash buffer. Political risks, higher inflation, a possible resurgence of currency volatility and the risk associated with low growth, support large geographical diversification and currency hedging. Didier Duret – Chief Investment Officer
+
Asia EM, IT, health care
base metals, silver, gold
investment-grade, inflation-linked, high-yield, European periphery
cash
20
10
equities
commodities real estate
neutral
hedge funds
bonds
financials, utilities -10
_
-20
core government 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
-30
active deviation (%)
ACTIVE STRATEGIES
Exploring New Facets
Economic growth may not be spectacular, but it is proceeding with unexpected resilience. After much negative news earlier in the year, China is one of the few countries successfully fuelling growth.
Resilience amid political risks 4
Four different fears took their toll on investor sentiment during
improvement in the credit channel, the end of austerity and
the last 12 months or so: a Chinese hard landing and aggres-
low commodity prices. The result is that all demand compo-
sive renminbi currency depreciation; a collapse of the oil price
nents are contributing to growth, making the economy less
leading to credit-quality problems in the energy sector; the
vulnerable. In absolute numbers, economic growth remains
threat of a recession in the US or the eurozone; and central
weak compared to history. This is due to the decline in the
banks running out of ‘bullets,’ i.e. monetary policies capable
potential growth rate, caused by factors such as demograph-
of stimulating growth.
ics and a lack of structural reforms.
In all four cases, the fears appeared to have been overdone.
CENTRAL BANKS UNLIKELY TO DO MORE SOON
China has continued its soft landing and policymakers have
Inflation is below target rates in most advanced economies,
brought the large capital outflows under control, leading to a
leading to a continued loose stance on monetary policy by
more stable exchange rate. Commodity prices have recovered
central banks. This is unlikely to change much during the period
somewhat, reducing fears of an avalanche of defaults in the
ahead. Further aggressive European Central Bank actions
sector. Growth in the US and the eurozone is not very strong,
seem unlikely in the near term, as some of the measures
but broad-based and firm enough to sustain itself. And, finally, central bankers continue to claim that they are never out of bullets.
POLITICAL RISKS LOOM Looking ahead, developments that could upset sentiment in financial markets during the next six months are mostly political: the fear of Britain leaving the EU (‘Brexit’), discussions about the fiscal position of several eurozone countries, new Spanish elections, Greece’s finances, the refugee crisis in Europe, widening cracks in European solidarity, terrorist attacks, geopolitical risks and US elections involving the unconventional Donald Trump. Beyond the political risks, there is a powerful energy for policy changes, such as to revive infrastructure spending or initiate deep reforms. There is finally a movement away from austerity towards fiscal stimulation (see Graphic). It is not all positive, however. Policy changes could also lead to a return to nationalistic agendas, which would be detrimental to global trade.
POSITIVE, BUT UNSPECTACULAR, GROWTH Recent economic developments have been encouraging, and the outlook is for continued moderate economic growth and very modest inflation. The US labour market is providing jobs and income to consumers. Higher oil prices are reducing the risks in the energy sector. Growth in the eurozone is supported by a range of factors, such as low interest rates,
Investment Outlook June 2016
Group Economics Han de Jong – Chief Economist
announced in March have not yet taken effect. The US will
FORECASTS: MACRO INDICATORS (%)1
be cautious in terms of monetary policy changes, given earlier
20 May 2016
Real GDP growth 2016
experience of negative market reactions to tightening and weak spots in the recovery.
Inflation 2016
ABN
Market
ABN
Market
AMRO
view
AMRO
view
US
1.7
2.0
1.4
1.3
Recent data suggests that Chinese policymakers are being
Eurozone
1.3
1.5
0.2
0.3
successful not only in preventing too sharp a slowdown, but
UK
1.6
2.0
0.5
0.7
also in triggering a modest acceleration in growth. Monetary
Japan
0.6
0.6
0.3
0.0
stimulus is leading to stronger credit growth, while stimulus
Other countries*
1.9
2.0
1.4
1.5
through infrastructure spending appears to be supporting the
EM Asia
industrial sector.
Latin America
1
6.4
6.4
5.5
5.5
-0.5
-0.8
18.9
17.4
Emerging Europe**
0.9
0.3
6.0
8.9
World
2.9
3.2
3.1
4.8
All forecasts are year averages.
* Australia, Canada, Denmark, New Zealand, Norway, Sweden and Switzerland. ** Belarus, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia, Slovenia, Turkey, Ukraine. Source: ABN AMRO Group Economics, Consensus Economics, EIU.
AUSTERITY AND STIMULUS POLICIES AS A % OF GDP +2
stimulus Eurozone US
+1
0
-1
-2 austerity -3
07
08
09
10
Source: IMF. ABN AMRO Group Economics
11 12 Year
13
14
15
16
5
Exploring New Facets
Sector rotation presents opportunities. In a maturing equity market, innovative IT and health care companies are preferred.
Equities: focus on income 6
Despite sensitivity to short-term market sentiment, equi-
innovation in areas such as biotechnology. Ageing populations
ties continue to be attractive. With a dividend yield of about
also drive demand for the health-care sector.
3%, equities are preferred to bonds and other asset classes. Earnings-growth forecasts are moderately positive, although
Contrary to consensus, we are not overly positive on the
reduced. The global average forecast for 2016 earnings is 2%
consumer-discretionary sector. Any increase in sales as a
and 13% for 2017. We expect equity returns to be in line with
result of lower oil prices appears to be over; and spending on
earnings growth.
luxuries in emerging-markets remains subdued. Our general recommendation is to invest in industry leaders and compa-
Following a seven-year progression, the equity market rally is
nies offering diversified exposure to growth.
maturing. Several markets are trading near all-time highs. After increasing the equity position in mid-February, we trimmed it
EQUALLY POSITIVE ON THE US AND EUROPE
in April but remain overweight. In recent months, large equity
We equally prefer Europe and the US for equity investment, as
sector rotations have taken place, creating opportunities for
expected earnings-growth rates for 2016 and 2017 are compa-
sector positioning.
rable. We became more positive on the US, after valuations retreated. The US market is also more defensive with lower
FINANCIALS UNDER PRESSURE
volatility than in Europe. On forward price/earnings, the US is
We recommend equity investors to move out of the finan-
trading at 17.1x and Europe at 14.7x.
cials sector (reducing it to underweight) and to add telecoms (increasing to neutral). Income growth in the financials sector is weakening, while the telecoms sector offers an attractive dividend yield of around 4%. We expect profitability in the financials sector to weaken, as margins remain under pressure given low interest rates, despite healthy loan growth. Within financials, which is the dominant (20%) sector within the overall equity market, we prefer insurance companies for their defensive characteristics. In Europe, the balance sheets of most telecom companies have improved. Many operators are paying solid dividends. It is, however, a mature and competitive industry with low pricing power and a continuing need for investments.
DEFENSIVE-GROWTH COMPANIES PREFERRED Given positive but moderate global growth, we recommend investing in defensive companies that are reasonably-valued and have high earnings growth. This can be found in the innovation-oriented information technology (IT) and health care sectors (see Graphic). Within the IT sector, we prefer global internet players and avoid lower-margin hardware companies. The health-care sector is favoured based on continued
Investment Outlook June 2016
Investment Strategy & Portfolio Expertise Annemijn Fokkelman - Global Head Equity Strategy & Portfolio Management
The interest rate outlook, however, is more favourable for Europe, where it is expected to remain low for longer, while
DEFENSIVE GROWTH SECTORS HAVE BETTER MEDIUMTERM EARNINGS-PER-SHARE GROWTH
the US plans an eventual hike in rates. Within our balanced
Utilities
position in emerging markets, we continue to prefer Asia
4.7%
Financials
and, in particular, China, based on rising consumer-oriented growth. Asia emerging markets are also more attractive in
overweight
7.5%
Consumer staples
such as South America and eastern Europe.
neutral
7.0%
Telecom
comparison with commodity-dependent emerging-markets,
underweight
8.0% 8.5%
Materials Industrials
9.4%
Health care
10.7% 12.0%
Energy
13.4%
IT Consumer discretionary 0%
14.7% 5%
10%
15%
Medium-term global earnings-per-share compounded average growth rate 2015/2018e. Source: ABN AMRO Private Banking, IBES
FORECASTS: EQUITY INDEXES
MSCI ACWI
19 May 2016
Active
Forward
strategy
P/E 2016
391.13
Overweight
15.5
S&P 500
2,040.04
Neutral
17.0
Euro STOXX 50
2,919.22
Neutral
12.9
FTSE-100
6,053.35
Neutral
15.7
Nikkei 225
16,646.66
Neutral
16.0
DAX
9,795.89
Neutral
12.4
CAC 40
4,282.54
Neutral
13.8
428.27
Neutral
16.4
19,694.33
Neutral
10.2
AEX Hang Seng Index MSCI China Straits Times Index Sensex Source: Bloomberg
Overweight
8.7
2,740.11
53.00
Neutral
12.4
25,399.72
Neutral
17.8
7
Exploring New Facets
In a fragile bond market, we suggest combining investment-grade and high-yield credits to add return and a core government bond strategy to emphasise diversification, duration management and protection.
Bonds: balancing safety and return 8
After a shaky start to 2016, our optimistic view on European
With government bond yields at rock bottom (see Graphic),
corporate bonds is paying off. Still, the lessons learned from
they have also lost their insurance function for when market
the turmoil in financial markets is that the fate of these risky
sentiment turns sour. Since we believe that sentiment is still
bonds is closely tied to that of equities. As sentiment is fragile,
fragile, we think that it is important to re-establish the buffer
we are balancing this return-enhancing position with a strat-
function that bonds traditionally play in portfolios. This is
egy based on safer core government bonds.
primarily their ability to stabilise returns. With this in mind, we initiated a core government bond strategy that actively
We have long been negative on bonds in our asset allocation,
manages duration (exposure to interest rates). The strategy
due to the low interest rates. Within the bond portfolio, we
shortens duration when yields are trending up and lengthens
hold eurozone peripheral and corporate bonds because of their
duration when yields are trending down.
higher yield. But this tactical bond portfolio is also more correlated with equities. As such, when equities correct, a portfolio
PROFITS-TAKEN IN PERIPHERY BONDS
of credit bonds gives very little protection.
This strategy also improves our geographical diversification by investing in German Bunds, US Treasuries and Japanese
CENTRAL BANK POLICIES KEEP RATES LOW
government bonds. When introduced, this strategy was
The policies of the European and US central banks are keeping
financed by taking profits in eurozone peripheral bonds.
core government bond yields low, and for some government
Peripheral spreads were relatively stable in the turmoil of the
bonds, yields are negative. Benchmark yields on both sides of
first six weeks of 2016, but moved gradually wider as Brexit
the Atlantic are steered by monetary policy and have stayed at
fears swelled. Given the rising political risks in Europe, we
depressed levels, even as recession fears eased. As a result,
thought it was time to trim exposure.
their yield curves have lost their signalling function for predicting nominal economic growth.
Investment Outlook June 2016
Investment Strategy & Portfolio Expertise Mary Pieterse-Bloem – Global Head Fixed Income Strategy & Portfolio Management
ECB POLICY SUPPORTING CREDITS
FORECASTS: INTEREST RATES AND BOND YIELDS (%)
Another lesson from the turbulent beginning of 2016 is the
12 May 2016
Q4 2016
Q4 2017
importance of staying the course. We believed through-
US
out, and still do, that European corporates are well placed to
US Fed
0.38
0.38
1.13
benefit from the economic recovery in Europe, even though
3-month
0.64
0.60
1.40
the recovery remains modest. The ECB’s buying of corporate
2-year
0.73
1.20
2.00
bonds as part of an extended asset-purchase programme is
10-year
1.77
2.20
2.50
9
also providing support to our European investment-grade and high-yield positions.
Germany ECB Refi
0.00
0.00
0.00
We moved away from the US high-yield market, due to its
3-month
-0.25
-0.35
-0.35
high exposure to the energy sector, where defaults are now
2-year
-0.51
-0.50
-0.50
rising. While our inflation-linked bonds have not performed
10-year
0.14
0.50
0.80
according to our expectations, they remain in the portfolio,
Source: ABN AMRO Group Economics
as the prospect for higher inflation has risen with higher oil
Yield in %
prices. Nominal yields may not be responding all that much to
Inflation
higher nominal growth, but inflation-linked bonds will certainly respond to the higher headline inflation we are expecting.
BUNDS AT RISK OF HIGHER INFLATION Yield in % 4.0 3.5
Eurozone inflation ( ) Forecast YoY (rhs) 10-year Bund ( ) Forecast (lhs)
Inflation in % 3.5 3.0 2.5
3.0
2.0
2.5
1.5
2.0
1.0
1.5
0.5
1.0
0.0
0.5
-0.5 -1.0
0.0 2011 2012 2013 2014 2015 2016 Year Source: Bloomberg, ABN AMRO Group Economics
2017
Exploring New Facets
Sharp turnaround in commodities Commodity prices have rallied sharply so far this year. Precious metals rose faster than expected, with gold reaching above USD 1,300 per ounce. Cyclical precious metals, such as platinum and palladium, outperformed both gold and silver.
10
Iron ore and steel prices have also strongly recovered this year, based on improved economic sentiment regarding China. Although fundamentals support an improvement in sentiment, market prices may have gone too far due to speculative behaviour, as Chinese industrial demand remains prone to oversupply. Oil prices rallied by more than 75% in just three months, based on hopes of a production freeze by both OPEC and non-OPEC countries and in combination with increased speculation antici-
FORECASTS: COMMODITIES 19 May 2016
pating a tightening of global oversupply.
Spot
2016
2017
index
avg
avg
IMPROVING FUNDAMENTALS ADD SUPPORT We expect more support for many commodities during the remainder of the year. This positive
Oil Brent USD/bbl
47.8
55
60
view is based on a modest improvement in US and eurozone economic data in the course of
WTI USD/bbl
47.2
55
60
2016 and 2017. The inflationary implication of higher oil prices could also lend support to gold,
Gold USD/oz
1254
1283
1401
Silver USD/oz
16.66
17.4
22
We believe that silver will outperform gold, and also for gold to continue rallying in 2016 and
1019
1078
1300
2017. Demand for cyclical metals, such as copper and zinc, could also improve, resulting in
which tends to rise when oil prices recover (see Graphic).
Metals
Platinum USD/oz Palladium USD/oz
574
600
700
Aluminium USD/t
1546
1550
1650
Copper USD/t
4575
5050
6050
Source: ABN AMRO Group Economics
prices rising further. Monetary policies of the major central banks have had the consequence of reducing the attraction for the US dollar. This weakness, combined with low relative real yields supports commodities.
GOLD TENDS TO RISE WHEN OIL PRICES RECOVER USD 200
Brent oil price (lhs)
OIL PRICES EXPECTED TO RISE USD
We expect more support for oil prices during the second half of 2016,
2000
as demand will absorb oversupply. Nevertheless, even despite the lack of investment in the oil sector, prices will likely not reach the previ-
Gold price (rhs) 150
ous plateau of USD 100 per barrel any time soon. Volatility could also 1500
remain high, as investor focus will continue to switch between the existing global oil oversupply, growth in demand and production cuts as a result of low oil prices.
100
1000
Group Economics Hans van Cleef - Senior Energy Economist 50
500
0
0 94 96 98 00 02 04 06 08 10 12 14 16 Year
Source: Datastream
Investment Outlook June 2016
The dollar rally is over The US dollar rally of the past few years rested on three important drivers: monetary policy divergence, the decline in commodity prices and the collapse in emerging markets currencies. Since earlier this year, these three drivers have turned negative for the dollar. The ECB and the Bank of Japan (BoJ) will likely continue easing their monetary policies, but the policies are no longer geared towards currency weakness. For the ECB, the focus is now more on the credit channel than on measures aiming to weaken the euro further. Financial markets have seen the limits of monetary easing and
COMMODITIES GAIN AS THE US DOLLAR WEAKENS 1994-2016 130
500
120
400
110 300 100 200 90 100
80
US Dollar Index (lhs) CRB commodities index (rhs)
have pushed the euro and the yen higher. The quantitative easing of central banks may be very successful in weighing on a currency at the start, but it loses impact over time. This
70
94
96
98
00
02
04
06
08
10
12
14
0
16
Year
occurred with the US dollar and is now being seen with the euro and the yen.
Source: Datastream
As the dollar weakened, commodity prices have gained. This
FORECASTS: DEVELOPED-MARKETS CURRENCIES
is a continuation of a long-term pattern (see Graphic). It does
FX pair
not mean that prices go up in a straight line, but the environ-
EUR/USD
ment becomes much more supportive for commodities and
USD/JPY
related currencies.
EUR/JPY
123.21
127
121
GBP/USD
1.4635
1.48
1.56
EURO VERSUS THE DOLLAR NOW RANGE-BOUND
EUR/GBP
0.7660
0.78
0.74
The euro versus the US dollar (EUR/USD) has been resil-
EUR/CHF
1.1076
1.10
1.14
ient, mainly because of a weaker US dollar after a downward
AUD/USD
0.7201
0.76
0.80
adjustment in market expectations regarding rate hikes by the
NZD/USD
0.6756
0.68
0.72
Federal Reserve. The EUR/USD may rally towards 1.20, if US
USD/CAD
1.3091
1.20
1.15
economic data continues to be weaker than expected.
EUR/SEK
9.3563
9.25
8.75
EUR/NOK
9.3611
8.75
8.25
If there is a significant uptrend in the euro, the ECB may cut
19 May 2016
Q4 2016
Q4 2017
1.1211
1.15
1.15
109.90
110
105
FORECASTS: EMERGING-MARKETS CURRENCIES
the deposit rate further. For the foreseeable future, we expect
USD/CNH (offshr)
the EUR/USD to be range-bound at around 1.15, remaining in a
USD/INR
range of 1.10-1.20. If the range is broken, we expect that it will
USD/SGD
1.3798
1.40
1.35
likely be on the side of further US dollar weakness.
USD/TWD
32.4000
33.00
32.00
13565
13500
13000
66.4809
60.00
55.00
USD/IDR
6.5643
6.70
6.80
67.37
67.00
65.00
Group Economics
USD/RUB
Georgette Boele - Coordinator FX & Precious Metals Strategy
USD/TRY
2.9929
2.75
2.75
EUR/PLN
4.3950
4.35
4.20
EUR/CZK
27.0230
27.00
26.00
EUR/HUF
316.1760
305.00
290.00
USD/BRL
3.5654
3.50
3.30
USD/MXN
18.4756
16.75
15.25
Source: ABN AMRO Group Economics
11
Exploring New Facets
12
Hedge funds offer access to benchmark-independent investment ideas, but can also deflect specific risks.
Property is attractive based on income and as an inflation hedge.
Hedge funds
Property
The first quarter of 2016 was a mirror image of 2015.
Real estate fundamentals are solid, dividend yields are
Sectors with strong momentum lost ground and emerging-
attractive, momentum is positive and, as an asset class, real
markets equities started to outperform developed markets.
estate can perform well in a maturing economic cycle.
Performance momentum in many markets also reversed. History has shown that market reversals, while generally
Last year, which was a volatile year for markets, real estate
short-lived, are bad for hedge fund returns.
outperformed equities by 10% in euro terms, as measured by the FTSE EPRA/NAREIT Developed Index, which tracks the
EQUITY STRATEGIES
performance of listed real estate companies and real estate
We continue to expect a reduced impact of central bank easing
investment trusts worldwide. We believe that this outper-
on stock-market performance and for fundamentals to return
formance could continue in 2016.
to being the market’s driving force. An increase in price dispersion between sectors will support returns for long and short
Real estate is highly correlated with economic growth.
equity allocations. With Brexit as a potential negative market
Although global growth is modest, retail sales still show some
catalyst, most managers are running very conservative gross
gains, labour markets are improving and urbanisation is a long-
and net market positions. This means that most hedge-fund
term driver supporting the asset class. Moreover, new supply
equity-strategy managers have a bias for downside protection
of real estate remains limited in several markets.
over upside potential.
LOW INTEREST RATES BENEFICIAL FIXED-INCOME STRATEGIES
The extreme accommodative stance of most central banks
Volatility in corporate credit markets and performance disper-
around the world, which is keeping bond yields and interest
sion between companies based on credit ratings are expected
rates low, is driving a search for yield that benefits real estate.
to continue. Given the maturity of the credit cycle, we
Listed real estate has a dividend yield of around 3.8% compared
expect to profit from short positions on single bond issuers.
with 2.7% for the developed equity market. Low interest rates
Mortgage-backed securities (MBS) continue to offer better
also help to justify higher real estate valuations. In general, we
return opportunities than corporate credit markets. MBS are
believe the sector is more or less fairly valued, except for mega
benefiting from the appreciation of US residential real estate,
cities, such as New York, Hong Kong and London.
increasing affordability, improving fundamentals, lower oil prices and rising wages. Merger arbitrage strategies are very
SUITABLE FOR A MATURING ECONOMIC CYCLE
attractive, based on the wide differences in the internal rates
Seven years after the financial crisis and in an environment
of return that underlie individual corporate transactions.
of a modest recovery, where traditional sources of yield have declined, real estate is a relatively attractive asset class. It is
TRADING STRATEGIES
an effective hedge against inflation and has stable cash flows,
Trend-following hedge fund strategies have proven to offer
given the long-term nature of rental contracts. These defen-
diversification in the midst of market turmoil. Early in the year,
sive characteristics will benefit real estate as the economic
managed-future programs performed very well. Short-equity
cycle matures and in an environment when financial asset
and long-bond positions were the main performance drivers.
volatility may increase.
Strong market reversals, however, have eroded most of these returns. Nonetheless, these strategies continue to fulfil their role of portfolio insurance.
Investment Products & Wealth Solutions Wilbert Huizing - Specialist Investment Products
Investment Strategy & Portfolio Expertise Ralph Wessels – Equity Research & Advisory Expert
Investment Outlook June 2016
Private equity markets are driven by the availability of capital and attractively priced companies. In today’s market, the supply of capital is ample, but valuations are challenging.
Ample capital for private equity Private equity funds that achieved their fundraising targets in
Fund managers targeting mid-market companies, with
the first quarter of 2016 represented commitments worth a
sales between USD 50 million and USD one billion continue
total of USD 71 billion, compared to USD 67 billion in the same
to operate in a market with many opportunities. We favour
quarter of 2015. On average, fundraising was completed in
managers with proven operational skills and access to propri-
13 months, while top funds met their targets within just six
etary deals. We expect that these managers will be able to
months. Moreover, the target size of funds was exceeded by
negotiate better deals, as they will have more control and will
about 10%, an achievement not seen since 2006 and 2007.
be less dependent on other investing techniques, such as buying companies at auctions.
The total amount available for direct private equity investments, which includes new funds and uninvested capital from
Investment Products & Wealth Solutions
previously raised funds, is estimated at about USD 775 billion,
Eric Zuidmeer – Senior Specialist Private Equity
an historical high.
VALUATIONS REMAIN AT PEAK LEVELS The picture is challenging in terms of company valuations, however. Transaction multiples peaked in the third quarter of 2015 and have remained steady since then, but with a large dispersion. There is increasing interest in the relatively more expensive growth companies in the media, consumer and technology-related sectors. These trends are expected to continue in the second half of the year. The energy sector has been less active in terms of transactions, which can be explained by the drop in oil prices. Although recently, and especially in the US, there is an increase in what may be a speculative interest in distressed oil-related assets. Debt-to-equity ratios for transactions are currently around 50%, which implies that deals remain conservatively financed. The combination of higher transaction multiples and a relatively high portion of equity would dilute equity returns. In a low yield environment, this might be acceptable.
DECLINE IN GLOBAL BUYOUTS In the first three months of 2016, global buyout deals declined significantly. This could be an indication that managers are being careful and selective, which is an important quality in today’s markets. For earlier-stage venture capital investments, the number of deals has increased slightly, confirming the momentum seen in the e-commerce, media and financial technology areas.
13
Exploring New Facets
A tumultuous start to the year hurt performance. We retain our view that risky assets will provide the bulk of future returns.
Performance: recovery after sell off 14
Our conviction that risky assets will drive long-term performance
Equity markets, credit bonds and commodities that had sold off
was challenged in the first six weeks of the year. The beginning
at the start of the year, recovered sharply later, but the gains were
of the year saw markets reacting violently to a variety of fears,
insufficient to offset the deep decline. There were also differences
ranging from the decline in oil prices, asset price volatility in China
between US-dollar and euro portfolios, with euro-denominated
and uncertainty surrounding central bank actions in a low-inflation
assets generally performing more poorly (see Graphic).
environment. This led volatility to surge to levels rarely seen during economic expansions. At its lowest point, on 11 February, the
ASSET ALLOCATION ADJUSTMENTS
MSCI World Index had lost close to 16% (in euro terms) since the
Over the period, the Global Investment Committee initiated two
start of the year.
timely decisions. Close to the time of the turnaround in midFebruary, exposure to equities was increased. And, later, in mid-
Markets turned in mid-February. A rally occurred as confidence
April, after the strong recovery, the overweight allocation to equi-
was restored in China, Saudi Arabia and Russia agreed on an oil
ties was reduced. The proceeds were used to increase the cash
production freeze, the US Federal Reserve delayed its plan to raise
allocation in most risk profiles and also to increase exposure in
rates, the ECB expanded its existing bond buying programme and
listed real estate.
volatility subsided. In an environment driven by lack of liquidity, bursts of high corre-
STRONG RECOVERY AFTER SHARP CORRECTION
lations between asset classes and forced sellers, long-term
Our performance closely mirrored the market’s gyrations. There
investors can use market declines to adjust market exposure
was a negative performance in the first part of the period,
and thereby increase expected returns. This strategy, however,
followed by a strong recovery, in both absolute and relative terms.
requires a willingness to accept risk and works best with a long-
Throughout, we generally retained our constructive view on risky
term investment horizon.
assets and avoided “safe” assets, such as government bonds.
Investment Strategy & Portfolio Expertise Paul Groenewoud – Quant Risk Specialist
Investors should expect only modest returns from safe assets on a forward-looking basis. This does not, however, imply that government bonds cannot produce intermittent positive returns, as has been seen lately. Our view, however, is that in the long run, risky assets will provide the bulk of future returns. The asset allocation mirrors this view.
PERFORMANCE (%) OF THE TACTICAL ASSET ALLOCATION VERSUS THE STRATEGIC ASSET ALLOCATION EUR 22 May 2003 to 29 April 2016*
USD 2016 YTD (29 April 2016)
22 May 2003 to 29 April 2016*
2016 YTD (29 April 2016)
Strategic Tactical Excess Return Strategic Tactical Excess Return Strategic Tactical Excess Return Strategic Tactical Excess Return
Profile 1
72.41
75.70
1.91
0.99
0.75
-0.24
60.69
74.96
8.88
1.98
1.63
-0.34
Profile 2
80.16
89.08
4.95
0.18
-0.25
-0.43
70.33
85.53
8.92
2.15
2.07
-0.08
Profile 3
101.92
125.36
11.61
-0.59
-0.92
-0.33
96.74
120.39
12.02
2.11
2.00
-0.10
Profile 4
112.87
136.63
11.16
-1.62
-1.84
-0.22
110.43
131.64
10.08
2.01
1.72
-0.29
Profile 5
130.59
162.98
14.04
-2.67
-2.59
0.09
129.68
156.97
11.88
1.86
1.46
-0.40
Profile 6
139.36
169.57
12.62
-3.46
-3.38
0.09
140.48
165.01
10.20
1.72
1.22
-0.49
* 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.
Investment Outlook June 2016
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 profiles ASSET ALLOCATION
PROFILE 1
Asset class
Strategic Neutral
Min.
Tactical Deviation Max.
5
0
60
Bonds*
90
40
100
Equities
0
0
10
Alternative investments
5
0
10
Money markets
PROFILE 2 Strategic Neutral
44 51 0 5
Min.
Tactical Deviation Max.
39
5
0
70
-39
70
30
85
0
15
0
30
0
10
0
20
27 39 19 15
22 -31 4 5
Funds of hedge funds
5
5
0
5
5
0
Real estate
0
0
0
3
3
0
0
0
7
5
Commodities
Total Exposure
0
100
100
ASSET ALLOCATION
100
PROFILE 3
Asset class
Strategic Neutral
Min.
PROFILE 4
Tactical Deviation Max.
5
0
70
Bonds*
55
20
70
Equities
30
10
50
Alternative investments
10
0
20
Money markets
2
100
Strategic Neutral
20 30 35 15
Min.
Tactical Deviation Max.
15
5
0
70
-25
35
10
55
5
50
20
70
5
10
0
30
12 18 55 15
7 -17 5 5
Funds of hedge funds
5
5
0
5
5
0
Real estate
3
3
0
3
3
0
7
5
7
5
Commodities
Total Exposure
2
100
100
ASSET ALLOCATION
100
PROFILE 5
Asset class
Strategic
Money markets
2
100
PROFILE 6
Tactical Deviation
Neutral
Min.
5
0
Max. 70
Bonds*
15
0
40
Equities
70
30
90
Alternative investments
10
0
30
2 11 75 12
-3
Strategic Neutral
Min.
5
0
Tactical Deviation Max. 60
-4
0
0
25
5
85
40
100
0
30
2
10
2 0 86 12
-3 0 1 2
Funds of hedge funds
5
5
0
5
5
0
Real estate
3
3
0
3
3
0
Commodities
2
4
2
2
4
2
Total Exposure
100
100
100
100
*Recommended duration: long. Benchmark: Bank of America, Merrill Lynch Government Bonds 1-10 years. The tactical asset allocation reflects active strategies that account for medium- and short-term views and represent a deviation from the longer term strategic asset allocation.
15
Exploring New Facets
Contributors MEMBERS OF THE ABN AMRO BANK GLOBAL INVESTMENT COMMITTEE
16
Didier Duret
didier.duret@nl.abnamro.com
Chief Investment Officer Private Banking
Gerben Jorritsma
gerben.jorritsma@nl.abnamro.com
Global Head Investment Strategy & Portfolio Expertise
Han de Jong
han.de.jong@nl.abnamro.com
Chief Economist
Olivier Raingeard
olivier.raingeard@fr.abnamro.com
Head Investments Private Clients Neuflize OBC
Bernhard Ebert
bernhard.ebert@de.abnamro.com
Head Discretionary Portfolio Management Bethmann Bank
Rico Fasel
rico.fasel@nl.abnamro.com
Director Product Management Investment Advisory Netherlands
GROUP ECONOMICS Georgette Boele
georgette.boele@nl.abnamro.com
Coordinator FX & Precious Metals Strategy
Hans van Cleef
hans.van.cleef@nl.abnamro.com
Senior Energy Economist
Roy Teo
roy.teo@sg.abnamro.com
Senior FX Strategist
INVESTMENT STRATEGY & PORTFOLIO EXPERTISE Mary Pieterse-Bloem
mary.pieterse-bloem@nl.abnamro.com
Global Head Fixed Income Strategy & Portfolio Management
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
Shanawaz Bhimji
shanawaz.bhimji@nl.abnamro.com
Fixed Income Portfolio Manager
Annemijn Fokkelman
annemijn.fokkelman@nl.abnamro.com
Global Head Equity Strategy & Portfolio Management
Maurits Heldring
maurits.heldring@nl.abnamro.com
Senior Equity Research & Advisory Expert
Jaap Rijnders
jaap.rijnders@nl.abnamro.com
Senior Equity Research & Advisory Expert
Paul van Doorn
paul.van.doorn@nl.abnamro.com
Senior Portfolio Manager Equities
Ralph Wessels
ralph.wessels@nl.abnamro.com
Equity Research & Advisory Expert
Javy Wong
javy.wong@hk.abnamro.com
North Asia Equity Strategist
INVESTMENT PRODUCTS & WEALTH SOLUTIONS Eric Zuidmeer
eric.zuidmeer@nl.abnamro.com
Senior Specialist Private Equity
Wilbert Huizing
wilbert.huizing@nl.abnamro.com
Investment Product & Wealth Specialist
QUANTITATIVE ANALYSIS AND RISK MANAGEMENT Hans Peters
hans.peters@nl.abnamro.com
Head Investment Risk
Paul Groenewoud
paul.groenewoud@nl.abnamro.com
Quant Risk Specialist
Linus Nilsson
linus.nilsson@nl.abnamro.com
Quant Risk Specialist
INVESTMENT COMMUNICATIONS
This publication is produced by the Global Investment Communications team. If you have questions or comments, contact the team at I-Comms.Global@nl.abnamro.com.
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Europe
Middle East
ABN AMRO MEESPIERSON
ABN AMRO PRIVATE BANKING
AMSTERDAM
DUBAI (DIFC)
Rico Fasel
Bjorn Holderbeke
rico.fasel@nl.abnamro.com
bjorn.holderbeke@ae.abnamro.com
BANQUE NEUFLIZE OBC S.A. PARIS
Asia
Wilfrid Galand wilfrid.galand@fr.abnamro.com
ABN AMRO PRIVATE BANKING HONG KONG
BETHMANN BANK AG
William Tso
FRANKFURT
william.tso@hk.abnamro.com
Bernhard Ebert bernhard.ebert@bethmannbank.de
ABN AMRO PRIVATE BANKING SINGAPORE
ABN AMRO PRIVATE BANKING
Peter Ang
LUXEMBOURG
peter.ang@sg.abnamro.com
Jean-Marie Schmit jean.marie.schmit@lu.abnamro.com ABN AMRO PRIVATE BANKING ANTWERPEN - BERCHEM Tom Van Hullebusch tom.van.hullebusch@be.abnamro.com ABN AMRO PRIVATE BANKING CHANNEL ISLANDS Andrew Pollock andrew.pollock@gg.abnamro.com
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