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.
Contents
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.
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.
Looking beyond consensus views
Didier Duret
Chief Investment Officer,ABN AMRO Private Banking
June 2016
1
2
Exploring New Facets
Exploring new facets
“Exploring new facets of risk mitigation and
return, beyond the consensus view”
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.
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 elec-
tions. Volatility and investment opportunities, however, may not come from the events them-
selves, 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:
XX Guarding against the risk of higher inflation when bond yields are mostly negative in real
terms.
XX Capturing the risk premiums present in high-yield bonds and equities, with a focus on defen-
sive growth stocks. XX Seeking international diversification to mitigate the risks associated with low growth.
CONFRONTING THE CONSENSUS TRENDS XX Future 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. XX The 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.XX Geopolitical 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 MIXXX The 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.
3
Investment Outlook June 2016
XX Nationalistic policies that are driven by self-interest and conservatism could postpone
significant supply-side reforms and infrastructure spending, limiting the potential for
economic growth. XX Accelerated changes due to disruptive innovations, regulations, migration and climate
change require a new vision for fiscal policy.
OPPORTUNITIES DERIVED FROM THE REWARD OFFERED BY RISK XX Accumulate 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. XX Capture 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.XX European high-yield bonds are more attractive than emerging-markets bonds. XX International government bond exposure, where duration is managed actively and hedged
in base currencies adds both diversification and protection. XX Cultivate 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
cash
activ
e de
viat
ion
(%)
10
-10
-20
-30
_
+
core government
investment-grade,inflation-linked,
high-yield,Europeanperiphery
bonds
equities
financials,utilities
Asia EM, IT, health care
hedge fundsreal estate
commodities
base metals,silver, gold
20
neutral
ACTIVE STRATEGIES
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
4
Exploring New Facets
Resilience amid political risks
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.
Four different fears took their toll on investor sentiment during
the last 12 months or so: a Chinese hard landing and aggres-
sive renminbi currency depreciation; a collapse of the oil price
leading to credit-quality problems in the energy sector; the
threat of a recession in the US or the eurozone; and central
banks running out of ‘bullets,’ i.e. monetary policies capable
of stimulating growth.
In all four cases, the fears appeared to have been overdone.
China has continued its soft landing and policymakers have
brought the large capital outflows under control, leading to a
more stable exchange rate. Commodity prices have recovered
somewhat, reducing fears of an avalanche of defaults in the
sector. Growth in the US and the eurozone is not very strong,
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 LOOMLooking 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’), discus-
sions about the fiscal position of several eurozone countries,
new Spanish elections, Greece’s finances, the refugee crisis
in Europe, widening cracks in European solidarity, terror-
ist 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 auster-
ity towards fiscal stimulation (see Graphic). It is not all posi-
tive, however. Policy changes could also lead to a return to
nationalistic agendas, which would be detrimental to global
trade.
POSITIVE, BUT UNSPECTACULAR, GROWTHRecent 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 reduc-
ing the risks in the energy sector. Growth in the eurozone is
supported by a range of factors, such as low interest rates,
improvement in the credit channel, the end of austerity and
low commodity prices. The result is that all demand compo-
nents are contributing to growth, making the economy less
vulnerable. In absolute numbers, economic growth remains
weak compared to history. This is due to the decline in the
potential growth rate, caused by factors such as demograph-
ics and a lack of structural reforms.
CENTRAL BANKS UNLIKELY TO DO MORE SOONInflation is below target rates in most advanced economies,
leading to a continued loose stance on monetary policy by
central banks. This is unlikely to change much during the period
ahead. Further aggressive European Central Bank actions
seem unlikely in the near term, as some of the measures
5
Investment Outlook June 2016
FORECASTS: MACRO INDICATORS (%)1
20 May 2016 Real GDP growth 2016 Inflation 2016
ABN Market ABN Market
AMRO view AMRO view
US 1.7 2.0 1.4 1.3
Eurozone 1.3 1.5 0.2 0.3
UK 1.6 2.0 0.5 0.7
Japan 0.6 0.6 0.3 0.0
Other countries* 1.9 2.0 1.4 1.5
EM Asia 6.4 6.4 5.5 5.5
Latin America -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 4.81All 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
stimulus +2
+1
0
-1
-2
-3 07 08 09 10 11 12 13 14 15 16
Eurozone
US
Year
AUSTERITY AND STIMULUS POLICIES AS A % OF GDP
Source: IMF. ABN AMRO Group Economics
Group EconomicsHan de Jong – Chief Economist
announced in March have not yet taken effect. The US will
be cautious in terms of monetary policy changes, given earlier
experience of negative market reactions to tightening and
weak spots in the recovery.
Recent data suggests that Chinese policymakers are being
successful not only in preventing too sharp a slowdown, but
also in triggering a modest acceleration in growth. Monetary
stimulus is leading to stronger credit growth, while stimulus
through infrastructure spending appears to be supporting the
industrial sector.
6
Exploring New Facets
Equities: focus on income Despite sensitivity to short-term market sentiment, equi-
ties continue to be attractive. With a dividend yield of about
3%, equities are preferred to bonds and other asset classes.
Earnings-growth forecasts are moderately positive, although
reduced. The global average forecast for 2016 earnings is 2%
and 13% for 2017. We expect equity returns to be in line with
earnings growth.
Following a seven-year progression, the equity market rally is
maturing. Several markets are trading near all-time highs. After
increasing the equity position in mid-February, we trimmed it
in April but remain overweight. In recent months, large equity
sector rotations have taken place, creating opportunities for
sector positioning.
FINANCIALS UNDER PRESSUREWe recommend equity investors to move out of the finan-
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 PREFERREDGiven 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 inno-
vation-oriented information technology (IT) and health care
sectors (see Graphic). Within the IT sector, we prefer global
internet players and avoid lower-margin hardware compa-
nies. The health-care sector is favoured based on continued
Sector rotation presents opportunities. In a maturing equity market, innovative IT and health care companies are preferred.
innovation in areas such as biotechnology. Ageing populations
also drive demand for the health-care sector.
Contrary to consensus, we are not overly positive on the
consumer-discretionary sector. Any increase in sales as a
result of lower oil prices appears to be over; and spending on
luxuries in emerging-markets remains subdued. Our general
recommendation is to invest in industry leaders and compa-
nies offering diversified exposure to growth.
EQUALLY POSITIVE ON THE US AND EUROPEWe equally prefer Europe and the US for equity investment, as
expected earnings-growth rates for 2016 and 2017 are compa-
rable. We became more positive on the US, after valuations
retreated. The US market is also more defensive with lower
volatility than in Europe. On forward price/earnings, the US is
trading at 17.1x and Europe at 14.7x.
7
Investment Outlook June 2016
4.7%
7.0%
7.5%
8.0%
8.5%
9.4%
10.7%
12.0%
13.4%
14.7%
0% 5% 10% 15%
Utilities
Financials
Telecom
Consumerstaples
Materials
Industrials
Health care
Energy
IT
Consumerdiscretionary
overweight
neutral
underweight
DEFENSIVE GROWTH SECTORS HAVE BETTER MEDIUM-TERM EARNINGS-PER-SHARE GROWTH
Source: ABN AMRO Private Banking, IBES
The interest rate outlook, however, is more favourable for
Europe, where it is expected to remain low for longer, while
the US plans an eventual hike in rates. Within our balanced
position in emerging markets, we continue to prefer Asia
and, in particular, China, based on rising consumer-oriented
growth. Asia emerging markets are also more attractive in
comparison with commodity-dependent emerging-markets,
such as South America and eastern Europe.
Investment Strategy & Portfolio ExpertiseAnnemijn Fokkelman - Global Head Equity Strategy & Portfolio Management
19 May 2016 Active Forward
strategy P/E 2016
MSCI ACWI 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
AEX 428.27 Neutral 16.4
Hang Seng Index 19,694.33 Neutral 10.2
MSCI China 53.00 Overweight 8.7
Straits Times Index 2,740.11 Neutral 12.4
Sensex 25,399.72 Neutral 17.8
FORECASTS: EQUITY INDEXES
Medium-term global earnings-per-share compounded average growth rate 2015/2018e.
Source: Bloomberg
8
Exploring New Facets
After a shaky start to 2016, our optimistic view on European
corporate bonds is paying off. Still, the lessons learned from
the turmoil in financial markets is that the fate of these risky
bonds is closely tied to that of equities. As sentiment is fragile,
we are balancing this return-enhancing position with a strat-
egy based on safer core government bonds.
We have long been negative on bonds in our asset allocation,
due to the low interest rates. Within the bond portfolio, we
hold eurozone peripheral and corporate bonds because of their
higher yield. But this tactical bond portfolio is also more corre-
lated with equities. As such, when equities correct, a portfolio
of credit bonds gives very little protection.
CENTRAL BANK POLICIES KEEP RATES LOWThe policies of the European and US central banks are keeping
core government bond yields low, and for some government
bonds, yields are negative. Benchmark yields on both sides of
the Atlantic are steered by monetary policy and have stayed at
depressed levels, even as recession fears eased. As a result,
their yield curves have lost their signalling function for predict-
ing nominal economic growth.
With government bond yields at rock bottom (see Graphic),
they have also lost their insurance function for when market
sentiment turns sour. Since we believe that sentiment is still
fragile, we think that it is important to re-establish the buffer
function that bonds traditionally play in portfolios. This is
primarily their ability to stabilise returns. With this in mind,
we initiated a core government bond strategy that actively
manages duration (exposure to interest rates). The strategy
shortens duration when yields are trending up and lengthens
duration when yields are trending down.
PROFITS-TAKEN IN PERIPHERY BONDSThis strategy also improves our geographical diversification
by investing in German Bunds, US Treasuries and Japanese
government bonds. When introduced, this strategy was
financed by taking profits in eurozone peripheral bonds.
Peripheral spreads were relatively stable in the turmoil of the
first six weeks of 2016, but moved gradually wider as Brexit
fears swelled. Given the rising political risks in Europe, we
thought it was time to trim exposure.
Bonds: balancing safety and return
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.
9
Investment Outlook June 2016
Investment Strategy & Portfolio ExpertiseMary Pieterse-Bloem – Global Head Fixed Income Strategy & Portfolio Management
ECB POLICY SUPPORTING CREDITSAnother lesson from the turbulent beginning of 2016 is the
importance of staying the course. We believed through-
out, and still do, that European corporates are well placed to
benefit from the economic recovery in Europe, even though
the recovery remains modest. The ECB’s buying of corporate
bonds as part of an extended asset-purchase programme is
also providing support to our European investment-grade and
high-yield positions.
We moved away from the US high-yield market, due to its
high exposure to the energy sector, where defaults are now
rising. While our inflation-linked bonds have not performed
according to our expectations, they remain in the portfolio,
as the prospect for higher inflation has risen with higher oil
prices. Nominal yields may not be responding all that much to
higher nominal growth, but inflation-linked bonds will certainly
respond to the higher headline inflation we are expecting.
FORECASTS: INTEREST RATES AND BOND YIELDS (%)12 May 2016 Q4 2016 Q4 2017
US
US Fed 0.38 0.38 1.13
3-month 0.64 0.60 1.40
2-year 0.73 1.20 2.00
10-year 1.77 2.20 2.50
Germany
ECB Refi 0.00 0.00 0.00
3-month -0.25 -0.35 -0.35
2-year -0.51 -0.50 -0.50
10-year 0.14 0.50 0.80
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Year
10-Year German Bund
Forecast 10-Year German Bund
Eurozone Headline Inflation YoY (rhs)
Forecast Eurozone Headline Inflation YoY (rhs)
2012 2013 2014 2015 2016 2017 2011
Inflation in % Yield in %
Inflation in % Yield in %
10-year Bund ( ) Forecast (lhs) Eurozone inflation ( ) Forecast YoY (rhs)
BUNDS AT RISK OF HIGHER INFLATION
Source: Bloomberg, ABN AMRO Group Economics
Source: ABN AMRO Group Economics
10
Exploring New Facets
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.
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-
pating a tightening of global oversupply.
IMPROVING FUNDAMENTALS ADD SUPPORT We expect more support for many commodities during the remainder of the year. This positive
view is based on a modest improvement in US and eurozone economic data in the course of
2016 and 2017. The inflationary implication of higher oil prices could also lend support to gold,
which tends to rise when oil prices recover (see Graphic).
We believe that silver will outperform gold, and also for gold to continue rallying in 2016 and
2017. Demand for cyclical metals, such as copper and zinc, could also improve, resulting in
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.
19 May 2016 Spot
index
2016
avg
2017
avg
Oil
Brent USD/bbl 47.8 55 60
WTI USD/bbl 47.2 55 60
Metals
Gold USD/oz 1254 1283 1401
Silver USD/oz 16.66 17.4 22
Platinum USD/oz 1019 1078 1300
Palladium USD/oz 574 600 700
Aluminium USD/t 1546 1550 1650
Copper USD/t 4575 5050 6050
Group EconomicsHans van Cleef - Senior Energy Economist
Sharp turnaround in commodities
FORECASTS: COMMODITIES
0
500
1000
1500
2000
0
50
100
150
200
94 96 98 00 02 04 06 08 10 12 14 16
Brent oil price (lhs)
Gold price (rhs)
USD USD
Year
GOLD TENDS TO RISE WHEN OIL PRICES RECOVER
Source: Datastream
OIL PRICES EXPECTED TO RISEWe expect more support for oil prices during the second half of 2016,
as demand will absorb oversupply. Nevertheless, even despite the lack
of investment in the oil sector, prices will likely not reach the previ-
ous plateau of USD 100 per barrel any time soon. Volatility could also
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.
Source: ABN AMRO Group Economics
11
Investment Outlook June 2016
The dollar rally is over
FORECASTS: DEVELOPED-MARKETS CURRENCIESFX pair 19 May 2016 Q4 2016 Q4 2017
EUR/USD 1.1211 1.15 1.15
USD/JPY 109.90 110 105
EUR/JPY 123.21 127 121
GBP/USD 1.4635 1.48 1.56
EUR/GBP 0.7660 0.78 0.74
EUR/CHF 1.1076 1.10 1.14
AUD/USD 0.7201 0.76 0.80
NZD/USD 0.6756 0.68 0.72
USD/CAD 1.3091 1.20 1.15
EUR/SEK 9.3563 9.25 8.75
EUR/NOK 9.3611 8.75 8.25
FORECASTS: EMERGING-MARKETS CURRENCIESUSD/CNH (offshr) 6.5643 6.70 6.80
USD/INR 67.37 67.00 65.00
USD/SGD 1.3798 1.40 1.35
USD/TWD 32.4000 33.00 32.00
USD/IDR 13565 13500 13000
USD/RUB 66.4809 60.00 55.00
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
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
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
occurred with the US dollar and is now being seen with the
euro and the yen.
As the dollar weakened, commodity prices have gained. This
is a continuation of a long-term pattern (see Graphic). It does
not mean that prices go up in a straight line, but the environ-
ment becomes much more supportive for commodities and
related currencies.
EURO VERSUS THE DOLLAR NOW RANGE-BOUNDThe euro versus the US dollar (EUR/USD) has been resil-
ient, mainly because of a weaker US dollar after a downward
adjustment in market expectations regarding rate hikes by the
Federal Reserve. The EUR/USD may rally towards 1.20, if US
economic data continues to be weaker than expected.
If there is a significant uptrend in the euro, the ECB may cut
the deposit rate further. For the foreseeable future, we expect
the EUR/USD to be range-bound at around 1.15, remaining in a
range of 1.10-1.20. If the range is broken, we expect that it will
likely be on the side of further US dollar weakness.
Group EconomicsGeorgette Boele - Coordinator FX & Precious Metals Strategy
0
100
200
300
400
500
70
80
90
100
110
120
130
94 96 98 00 02 04 06 08 10 12 14 16
US Dollar Index (lhs) CRB commodities index (rhs)
Year
COMMODITIES GAIN AS THE US DOLLAR WEAKENS 1994-2016
Source: Datastream
Source: ABN AMRO Group Economics
12
Exploring New Facets
The first quarter of 2016 was a mirror image of 2015.
Sectors with strong momentum lost ground and emerging-
markets equities started to outperform developed markets.
Performance momentum in many markets also reversed.
History has shown that market reversals, while generally
short-lived, are bad for hedge fund returns.
EQUITY STRATEGIESWe continue to expect a reduced impact of central bank easing
on stock-market performance and for fundamentals to return
to being the market’s driving force. An increase in price disper-
sion between sectors will support returns for long and short
equity allocations. With Brexit as a potential negative market
catalyst, most managers are running very conservative gross
and net market positions. This means that most hedge-fund
equity-strategy managers have a bias for downside protection
over upside potential.
FIXED-INCOME STRATEGIESVolatility in corporate credit markets and performance disper-
sion between companies based on credit ratings are expected
to continue. Given the maturity of the credit cycle, we
expect to profit from short positions on single bond issuers.
Mortgage-backed securities (MBS) continue to offer better
return opportunities than corporate credit markets. MBS are
benefiting from the appreciation of US residential real estate,
increasing affordability, improving fundamentals, lower oil
prices and rising wages. Merger arbitrage strategies are very
attractive, based on the wide differences in the internal rates
of return that underlie individual corporate transactions.
TRADING STRATEGIESTrend-following hedge fund strategies have proven to offer
diversification in the midst of market turmoil. Early in the year,
managed-future programs performed very well. Short-equity
and long-bond positions were the main performance drivers.
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
Real estate fundamentals are solid, dividend yields are
attractive, momentum is positive and, as an asset class, real
estate can perform well in a maturing economic cycle.
Last year, which was a volatile year for markets, real estate
outperformed equities by 10% in euro terms, as measured by
the FTSE EPRA/NAREIT Developed Index, which tracks the
performance of listed real estate companies and real estate
investment trusts worldwide. We believe that this outper-
formance could continue in 2016.
Real estate is highly correlated with economic growth.
Although global growth is modest, retail sales still show some
gains, labour markets are improving and urbanisation is a long-
term driver supporting the asset class. Moreover, new supply
of real estate remains limited in several markets.
LOW INTEREST RATES BENEFICIAL The extreme accommodative stance of most central banks
around the world, which is keeping bond yields and interest
rates low, is driving a search for yield that benefits real estate.
Listed real estate has a dividend yield of around 3.8% compared
with 2.7% for the developed equity market. Low interest rates
also help to justify higher real estate valuations. In general, we
believe the sector is more or less fairly valued, except for mega
cities, such as New York, Hong Kong and London.
SUITABLE FOR A MATURING ECONOMIC CYCLESeven years after the financial crisis and in an environment
of a modest recovery, where traditional sources of yield have
declined, real estate is a relatively attractive asset class. It is
an effective hedge against inflation and has stable cash flows,
given the long-term nature of rental contracts. These defen-
sive characteristics will benefit real estate as the economic
cycle matures and in an environment when financial asset
volatility may increase.
Investment Strategy & Portfolio ExpertiseRalph Wessels – Equity Research & Advisory Expert
Hedge funds offer access to benchmark-independ-ent investment ideas, but can also deflect specific risks.
Property is attractive based on income and as an inflation hedge.
Hedge funds Property
13
Investment Outlook June 2016
Private equity funds that achieved their fundraising targets in
the first quarter of 2016 represented commitments worth a
total of USD 71 billion, compared to USD 67 billion in the same
quarter of 2015. On average, fundraising was completed in
13 months, while top funds met their targets within just six
months. Moreover, the target size of funds was exceeded by
about 10%, an achievement not seen since 2006 and 2007.
The total amount available for direct private equity invest-
ments, which includes new funds and uninvested capital from
previously raised funds, is estimated at about USD 775 billion,
an historical high.
VALUATIONS REMAIN AT PEAK LEVELSThe 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 transac-
tions, 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 rela-
tively high portion of equity would dilute equity returns. In a
low yield environment, this might be acceptable.
DECLINE IN GLOBAL BUYOUTSIn 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.
Ample capital for private equity
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.
Fund managers targeting mid-market companies, with
sales between USD 50 million and USD one billion continue
to operate in a market with many opportunities. We favour
managers with proven operational skills and access to propri-
etary deals. We expect that these managers will be able to
negotiate better deals, as they will have more control and will
be less dependent on other investing techniques, such as
buying companies at auctions.
Investment Products & Wealth Solutions Eric Zuidmeer – Senior Specialist Private Equity
14
Exploring New Facets
Performance: recovery after sell offOur conviction that risky assets will drive long-term performance
was challenged in the first six weeks of the year. The beginning
of the year saw markets reacting violently to a variety of fears,
ranging from the decline in oil prices, asset price volatility in China
and uncertainty surrounding central bank actions in a low-inflation
environment. This led volatility to surge to levels rarely seen during
economic expansions. At its lowest point, on 11 February, the
MSCI World Index had lost close to 16% (in euro terms) since the
start of the year.
Markets turned in mid-February. A rally occurred as confidence
was restored in China, Saudi Arabia and Russia agreed on an oil
production freeze, the US Federal Reserve delayed its plan to raise
rates, the ECB expanded its existing bond buying programme and
volatility subsided.
STRONG RECOVERY AFTER SHARP CORRECTIONOur performance closely mirrored the market’s gyrations. There
was a negative performance in the first part of the period,
followed by a strong recovery, in both absolute and relative terms.
Throughout, we generally retained our constructive view on risky
assets and avoided “safe” assets, such as government bonds.
Investors should expect only modest returns from safe assets on a
forward-looking basis. This does not, however, imply that govern-
ment 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.
Equity markets, credit bonds and commodities that had sold off
at the start of the year, recovered sharply later, but the gains were
insufficient to offset the deep decline. There were also differences
between US-dollar and euro portfolios, with euro-denominated
assets generally performing more poorly (see Graphic).
ASSET ALLOCATION ADJUSTMENTSOver the period, the Global Investment Committee initiated two
timely decisions. Close to the time of the turnaround in mid-
February, exposure to equities was increased. And, later, in mid-
April, after the strong recovery, the overweight allocation to equi-
ties was reduced. The proceeds were used to increase the cash
allocation in most risk profiles and also to increase exposure in
listed real estate.
In an environment driven by lack of liquidity, bursts of high corre-
lations between asset classes and forced sellers, long-term
investors can use market declines to adjust market exposure
and thereby increase expected returns. This strategy, however,
requires a willingness to accept risk and works best with a long-
term investment horizon.
Investment Strategy & Portfolio Expertise Paul Groenewoud – Quant Risk Specialist
EUR USD
22 May 2003 to 29 April 2016* 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.
PERFORMANCE (%) OF THE TACTICAL ASSET ALLOCATION VERSUS THE STRATEGIC ASSET ALLOCATION
A tumultuous start to the year hurt performance. We retain our view that risky assets will provide the bulk of future returns.
15
Investment Outlook June 2016
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).
*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.
ASSET ALLOCATION PROFILE 3 PROFILE 4Asset class Strategic Tactical Deviation Strategic Tactical Deviation
Neutral Min. Max. Neutral Min. Max.
Money markets 5 0 70 20 15 5 0 70 12 7
Bonds* 55 20 70 30 -25 35 10 55 18 -17
Equities 30 10 50 35 5 50 20 70 55 5
Alternative investments 10 0 20 15 5 10 0 30 15 5
Funds of hedge funds 5 5 0 5 5 0
Real estate 3 3 0 3 3 0
Commodities 2 7 5 2 7 5
Total Exposure 100 100 100 100
ASSET ALLOCATION PROFILE 1 PROFILE 2Asset class Strategic Tactical Deviation Strategic Tactical Deviation
Neutral Min. Max. Neutral Min. Max.
Money markets 5 0 60 44 39 5 0 70 27 22
Bonds* 90 40 100 51 -39 70 30 85 39 -31
Equities 0 0 10 0 0 15 0 30 19 4
Alternative investments 5 0 10 5 0 10 0 20 15 5
Funds of hedge funds 5 5 0 5 5 0
Real estate 0 0 0 3 3 0
Commodities 0 0 0 2 7 5
Total Exposure 100 100 100 100
ASSET ALLOCATION PROFILE 5 PROFILE 6Asset class Strategic Tactical Deviation Strategic Tactical Deviation
Neutral Min. Max. Neutral Min. Max.
Money markets 5 0 70 2 -3 5 0 60 2 -3
Bonds* 15 0 40 11 -4 0 0 25 0 0
Equities 70 30 90 75 5 85 40 100 86 1
Alternative investments 10 0 30 12 2 10 0 30 12 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
16
Exploring New Facets
MEMBERS OF THE ABN AMRO BANK GLOBAL INVESTMENT COMMITTEE
Didier Duret [email protected] Chief Investment Officer Private Banking
Gerben Jorritsma [email protected] Global Head Investment Strategy & Portfolio Expertise
Han de Jong [email protected] Chief Economist
Olivier Raingeard [email protected] Head Investments Private Clients Neuflize OBC
Bernhard Ebert [email protected] Head Discretionary Portfolio Management Bethmann Bank
Rico Fasel [email protected] Director Product Management Investment Advisory Netherlands
GROUP ECONOMICS
Georgette Boele [email protected] Coordinator FX & Precious Metals Strategy
Hans van Cleef [email protected] Senior Energy Economist
Roy Teo [email protected] Senior FX Strategist
INVESTMENT STRATEGY & PORTFOLIO EXPERTISE
Mary Pieterse-Bloem [email protected] Global Head Fixed Income Strategy & Portfolio Management
Roel Barnhoorn [email protected] Senior Fixed Income Thematic Expert
Willem Bouwman [email protected] Fixed Income Portfolio Manager
Chris Huys [email protected] Senior Fixed Income Portfolio Manager
Shanawaz Bhimji [email protected] Fixed Income Portfolio Manager
Annemijn Fokkelman [email protected] Global Head Equity Strategy & Portfolio Management
Maurits Heldring [email protected] Senior Equity Research & Advisory Expert
Jaap Rijnders [email protected] Senior Equity Research & Advisory Expert
Paul van Doorn [email protected] Senior Portfolio Manager Equities
Ralph Wessels [email protected] Equity Research & Advisory Expert
Javy Wong [email protected] North Asia Equity Strategist
INVESTMENT PRODUCTS & WEALTH SOLUTIONS
Eric Zuidmeer [email protected] Senior Specialist Private Equity
Wilbert Huizing [email protected] Investment Product & Wealth Specialist
QUANTITATIVE ANALYSIS AND RISK MANAGEMENT
Hans Peters [email protected] Head Investment Risk
Paul Groenewoud [email protected] Quant Risk Specialist
Linus Nilsson [email protected] 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 [email protected].
Contributors
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SUSTAINABILITY INDICATOR DISCLAIMERABN AMRO Bank N.V. has taken all reasonable care to ensure the indicators are reliable, however, the information is unaudited and subject to amendment. ABN AMRO Bank is not liable for any damage that constitute from the (direct or indirect) use of the indicators. The indicators alone do not constitute a recom-mendation in relation to a specific company or an offer to buy or sell investments. It should be noted that the indicators represent an opinion at a specific period of time considering a number of different sustainability considerations. The sustainability indicator is only an indication regarding the sustainability of a company within its own sector.
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