hongkongen
Letter from the CIO: Stay contrarian

Letter from the CIO: Stay contrarian

07-01-2021 | Insight
Keep questioning the consensus in 2021, says Victor Verberk, Robeco’s CIO Fixed Income and Sustainability.
  • Victor  Verberk
    Victor
    Verberk
    CIO Fixed Income and Sustainability and Portfolio Manager of Robeco Global Credits

Speed read

  • Investment success in 2021 will require research and contrarian thinking  
  • The focus is shifting to optimizing alpha as well as climate impact 
  • The excesses of the long-run secular cycle have not been shaken out of the system 

2020 was a tough year in many respects, with all of us experiencing loss in different areas of our lives. It may have been a time of loss for investors, too, even though many market segments ended the year at levels similar to twelve months previously, with some even hitting all-time highs. Although the Covid-induced market crash was followed by a policy-driven recovery in financial markets, the trajectory was violent and, in some respects, unconventional. 

Despite the challenges, the past year was also – investment-wise – a year of opportunity. For investors who understand cycles and who stayed contrarian, there were rewards. In fixed income we were able to take advantage of a beta opportunity in March, a cyclical recovery in June and the opportunity to buy into the ‘Covid-19 sector’ theme later in the year. Our clients’ portfolios benefited from these strategies. 

Stay informed on Sustainable Investing with monthly mail updates
Stay informed on Sustainable Investing with monthly mail updates
Subscribe

Question the consensus and be prepared for surprises

While the impact of Covid-19 has been devastating for health, there’s good reason to believe that its effect on economies and financial markets is temporary. There are no broken sectors, the banking industry is healthy and labor markets are recovering. 

But, contrary to the very optimistic scenario now being priced by the market, our view is that investors will still face some challenges in 2021. Given the starting point of financial asset valuations, the variability of outcomes in terms of market prices has increased significantly for all asset classes. And yet, only the best combination of possible outcomes is being priced by markets. The reality is that there are always surprises. At best, the year ahead could be boring, with credit markets delivering modest returns. At worst, we could be in for more bouts of volatility, surprises and weakness. In the short term, the best chance for good returns is the revival of value equity, given the broader economic recovery and a small rise in yields. 

Either way, investors must stay focused on finding value, maintain an active approach and be willing to stand by their convictions. This means questioning the consensus at all times. Even more fundamentally, investors must resist the urge to build forecasts by extrapolating the most recent trends – a common behavioral bias in the industry. Instead, as has been our approach throughout our 90-year history, investment choices must be based on disciplined research and a thorough understanding of market cycles. 

Climate-proof investing

In addition to these cyclical forces, there is also a new secular phenomenon at work that affects all market participants: a focus on sustainability and the drive to embed climate considerations into investment results.  

Robeco is fully equipped for this important secular change. We believe climate-related thinking and decarbonization are currently the most important development for the asset management industry, with the focus shifting to optimizing alpha as well as climate impact. Being prepared for these developments is critical to understanding which will be the winning sectors of the future and positioning portfolios accordingly. Our view is that the more investors take climate into account, the greater the likelihood that it will have an impact on market prices. This is also the outcome that regulators are aiming for

Sustainability has for years been integrated into our investment practices. We invest heavily in our ESG capabilities, including access to relevant quality data, analytical tools, transparent reporting and engagement. Climate-related risks and opportunities are factored into our investment processes, and we have launched strategies that focus specifically on contributing to the Paris Agreement and a global decarbonization trajectory. In line with this, Robeco has announced its ambition to achieve net-zero emissions with its investments by 2050. 

Our clients welcome these important changes. The sharpened focus on sustainability in 2020 confirmed this, as did the resulting inflows into our sustainable investing strategies, including our SDG strategy and green bond strategy.  

Understanding the secular cycle

This shift towards sustainable thinking is taking place against the backdrop of another critical secular phenomenon that shaped the investment landscape, namely the long-term debt super cycle. If you’re in the middle of it, it’s difficult to see a 20 to 30-year series of events with any clarity. But, for investors needing to make sound decisions, it’s vital to get to grips with these developments. 

Thirty years ago, the Chinese labor supply shock caused a permanent reduction in wages, triggering the large-scale outsourcing of manufacturing activity to emerging markets. In developed markets, capital investment as a share of GDP plummeted. Also, demographic forces drove a preference for saving instead of investing, causing a savings glut. Meanwhile, overconfident central bankers pushed yields ever lower, with the aim of incentivizing economic participants to start spending and borrowing. Combined, these forces resulted in a liquidity trap and a debt super cycle. And collectively we became addicted to low yields. In this world of globalization, there has been a winner-takes-all scenario in most sectors – and tech is just one of example of this phenomenon. We have also seen capital beating labor, which has caused corporate margins to stay at elevated levels. 

While overly simplified, this broadly outlines where we now are – and to some extent explains the overvaluations and the sudden and aggressive market movements. While yields had dropped continuously due to the savings surplus, and inflation was declared defeated, corporates boosted earnings per share via massive share buy backs that were funded by debt issuance. The healthier option would have been to increase investments and innovation, and to generate earnings growth from that. Instead, we have an environment in which central bank policy has resulted in yield suppression, too much liquidity, rising indebtedness and overcapacity. This overcapacity has been the consequence of creative destruction being avoided: everyone survives at zero rates, including the weak companies.

Every business cycle that played out during this massive globalization trade has been driven by growing debt and less inflation. Every cycle ended with lower yields and larger debt burdens, and with corporate optimism intact. To be fair, this optimism has been justified, more often than not, with equity markets, credit markets and even bond markets rallying. 

What’s next? Much like a pendulum, there is a natural tendency for markets and economies to return to equilibrium. The question is whether we will allow markets to look for an equilibrium or whether we will continue blowing bubbles. One possible theory is that it could be policy response that shakes things up. The first response in 2020 was indeed the correct one, as the flooding of markets with liquidity and massive fiscal stimulus was critical in preventing a meltdown. But the risk now is that we go into overdrive: if the economy heals and stimulus remains as is, markets will overheat. 

Another possible risk is that any reversal in the policy thrust will disrupt markets. A change in the policy direction will be a shock to markets, investors and businesses that for decades have been addicted to cheap(er) money. The danger is that such a disturbed market reaction could move policymakers to act out of fear and add even more stimulus, causing further distortions and delaying the return to equilibrium. This way the imbalances grow even further. 

For now, central banks have signaled that interest rates will stay low for a long time. In the next few years, when the economy has healed but stimulus is still excessive, markets will force central bankers to show their hand. At that point, with inflationary forces afoot, it will be tough for policymakers to uphold their promises to keep rates low. Although not a forecast of ours, rising rates is nevertheless a realistic scenario. Importantly, such a scenario is not priced by markets. 

When yields start to rise, markets will return to equilibrium, and excesses such as over-indebtedness and extreme mispricing will be dealt with. While we don’t know when this will be, we remain vigilant against dangerous consensus thinking and stay focused on doing our research. 

Technology as a tool to challenge thinking

Valuable tools such as machine learning, big data and artificial intelligence will help us in this process of constantly challenging our thinking and of extending our research. Our data scientists and data management systems analyze vast amounts of data, which over time will increase our understanding of our alpha skills. Technology will also help us not to fall victim to behavioral biases ourselves. It will not change the basic principles of successful investing, though. These principles will always be contrarian investing by buying low based on good analysis, and selling high based on conviction – and not on extrapolating forecasting errors. While harvesting behavioral biases will endure, the way in which this harvesting is done will change in the years ahead.  

A return to stable market performance and financial returns is not a guaranteed outcome once Covid-19 has been defeated. Instead, investment success will require knowledge, research and critical thinking. And this definition of success will continue to be redefined to incorporate the broader concepts of societal well-being and sustainable outcomes. As an investment house, we are ready to deploy our expertise and experience in these areas in 2021, for the benefit of our clients. 

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Logo

Disclaimers

1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree