Investors are still operating in a difficult, volatile market. Investment strategists Han Dieperink (Rabobank), Nathan Levy (ING) en Pim Lausberg (ABN Amro) agree on this, but they also each add their own interesting nuances to the outlook for financial markets and investing.
“This year will be the year of normalization, where we have to wean ourselves off the idea of relaxed monetary policy,” according to Han Dieperink, chief investment officer at Rabobank. He also notes that many investors don’t seem to be used to volatility anymore. “The majority are new investors who have joined the search for returns in recent years and have switched from savings into bonds and finally ended up in stocks. They have never before experienced a major correction.”
Nathan Levy, investment manager at ING, sees that investors view stock-market volatility in different ways. “Most see the recent price drops as a buying opportunity. That was different a few years back though.” Pim Lausberg, equity portfolio manager at ABN Amro, calls it a “challenging situation where stock prices are at high levels and alternatives have risen even more sharply. As a result, investors are wondering what they should do with their money.”
Robeco spoke with Dieperink, Levy and Lausberg about dominant investment themes, their expectations for equities and bonds and the role that the digitalization trend plays in their investment policy at Robeco Outlook – the yearly event in January where economists and strategists give their outlook for the coming year.
‘The equity rally has entered a mature phase’
Lausberg: “The policy of central banks, developments in emerging markets and the related effects that these have on the commodities markets. The policy of central
Levy: “China, oil and developed markets. The Chinese stock market is essentially a gambling den for speculators and has nothing to do with the reality of the Chinese economy. This doesn’t detract from the fact that by devaluing the yuan, Chinese government's currency policy puts downward pressure on the currencies of other emerging countries. And this could cause problems for those with considerable dollar debt.”
“Oil prices are likely to fall even further due to supply increases in emerging countries. And the weaker yuan could lead to even less demand from China.”
“Things are looking quite rosy in developed countries. The US economy is in good shape and counterbalancing the problems in emerging countries. The question is what will the Fed do with interest rates this year? We think at most it will opt for two new 25 bp hikes. The economy in the Eurozone is also doing well, although we believe that the low inflation and pressure exerted on this by low oil prices will lead to further accommodative measures by the ECB.”
Dieperink: “Normalization. Moving away from the monetary experiment of central banks and back to the economic growth factor. 2016 will be a year of transition from liquidity to the recovery of the real economy, rather than artificial recovery driven by monetary policy.”
‘Equities will be worth buying again soon’
Levy: “We are cautious about equities, but less negative than the market. Developed economies are doing well and we have yet to see signs of contagion from emerging markets. Sentiment indicators are currently so negative that equities will probably be worth buying again soon. It will be a difficult year for US stocks. For the second year running US companies are likely to notch up almost no earnings growth and they are not interesting from a valuation perspective either. The Eurozone looks more attractive than the US. The earnings growth for companies there will be better and valuations more attractive, with the ECB's QE program acting as an impetus.”
Lausberg: “Compared with other asset classes, equities are still attractive. The prospect of moderate recovery in the global economy is the main reason for remaining positive on stocks. This recovery will be driven by increasing consumer demand in developed markets and low commodities prices.”
“However, after seven years of rising prices, the equity rally has reached a mature phase. Investors should therefore be prepared for more subdued returns. We prefer European equities to their US counterparts. The growth potential from still low operating margin levels, the continued economic recovery in the Eurozone and the weak euro will boost the profitability of European companies.”
Dieperink: “In the next few years investors will achieve above-average equity returns – more than the long-term estimated return of 7.5 percent. We prefer equities outside the US, though.”
Lausberg: “Our policy is to avoid bonds, with the exception of the few segments of the market that generate higher returns than cash at an acceptable level of risk. We prefer European over US high yield corporate bonds. The majority of issuers in this segment are oil companies and the low oil price may hamper any refinancing they wish to undertake this year. Some oil producers will have problems repaying their loans.”
Levy: “The ECB’s relaxed monetary policy and the improved economic growth make European investment grade corporate bonds interesting. US high yield bonds are becoming more attractive now that the spreads have widened. We believe that current price levels more than discount the risk of insolvency among oil producers. Prices in other sectors also reflect this, as though the problems are much greater than they really are. Government bonds remain tricky.”
Dieperink: “Bonds will probably generate below-average returns – less than the long-term estimated returns of 1.5 percent. The added value of bonds in an investment portfolio is decreasing. They don’t generate returns and if you look at how much they fluctuate at the slightest unrest on the market, a 20-year bond looks just as volatile as the equity market.”
‘Digital revolution – a fantastic opportunity to deal with major crises’
The theme of the Robeco Outlook was ‘digitalization as an investment trend’. Digitalization certainly plays a role in the investment policy of Dieperink, Lausberg and Levy. “In two ways,” says Dieperink. “Digitalization has facilitated heavily data-based investment products like ETFs and multi-factor funds and we make grateful use of these. But we also see digitalization as an investment opportunity. Besides agribusiness and consumer trends, ‘producer trends’ is a third theme in our investment policy. Digitalization and robotics may still cause a fair amount of commotion among producers. Companies that are able to adapt will be the winners and those that can't, will lose out.”
Lausberg and Levy also see that digitalization is rapidly changing the world and that some companies are able to keep up while others fall by the wayside. “Take how digitalization has completely transformed the worldwide travel and tourism industry. New players like cheap airlines and online travel agencies are undermining the traditional business models. This trend is gaining traction thanks to the development of the mass market – like the Chinese middle class, for whom foreign travel is becoming increasingly possible,” says Lausberg. Investors are trying to invest in companies that are using digitalization to gain a lead, and to avoid the losers.
Digitalization is often also discussed in the context of the disruptive effect it can have on business models and even entire industries. Dieperink has a less bleak take on this. “The digital revolution is a fantastic opportunity to deal with the major crises of our time – food, water, the environment, climate, debt problems and income inequality. I don’t really buy into doom and gloom scenarios, with millions becoming unemployed because of the digital revolution. We shouldn’t underestimate the ability of humans to adapt – a key characteristic that has enabled our species to achieve so much. The prosperity and wellbeing – albeit hard to quantify – of every world citizen could therefore improve significantly in the next century.”
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