KBC INVESTMENT STRATEGY PRESENTATION. Defensive August 2017

Transcription

1 KBC INVESTMENT STRATEGY PRESENTATION August 2017

2 Investment climate Key rate trends and outlook 2,0 2,0 1,5 VS EMU 1,5 0,5 0,5 0,0 0,0-0,5-0, Ten-year interest rate developments and prospects 5,0 5,0 Ten-year interest rate USA Ten-year interest rate Germany 3,0 3, Global economy performing strongly Little has changed compared with the previous month. Importantly, the loss of momentum appears to have eased. Business confidence indicators are rising again after a short pause, suggesting a continuing positive economic development in the months ahead. United States (US) The economic situation in the US still looks good. One positive development is that the doubts about the recovery in growth which we expressed last month have been removed. The soft data (confidence indicators) are strong, while the hard data (outturns such as industrial production) are also improving. The labour market report confirms the robustness of the labour market: new jobs were created in June (well above expectations), the workforce participation rate rose to 68% and the unemployment rate stood at 4.4%. Euro area The euro area indicators present a picture of synchronised optimism. In addition to Germany, the other key euro area countries are also doing better. The revival in the confidence indicators appears to be unstoppable, especially in the manufacturing industry. The higher growth means that employment is increasing while unemployment (currently 9.3%) is currently declining, but wage growth remains low. The biggest political concerns appear to have eased for the moment, but could quickly re-emerge.

3 Investment climate United Kingdom (UK) Just over a year ago, the British electorate voted to leave the European Union (Brexit). However, Brexit has not happened yet; the negotiations have barely begun, and precisely what the exit conditions will end up being is anybody s guess. The UK is not in recession, but the economic data do suggest a slowdown. The biggest reason for this slowdown is the weaker pound, which is pushing up inflation (2.9% in May) and weighing on consumer confidence and purchasing power. Producer confidence has also been dented. So far, the labour market has held up well, with unemployment standing at 4.5% in May, the lowest since Japan Japan continues to report better macroeconomic figures, though in absolute terms these figures are still fairly low. The Japanese export industry is performing well on the back of the weaker yen, confirming the strong global growth. Emerging markets The emerging markets are also joining the global recovery. We are seeing increasing evidence that the government In China will be able to smooth the way for a soft landing. The transition to an investment-led rather than consumption-driven economy is gradually taking place. Political unrest, such as the missile tests by North Korea, do nothing to change the strong underlying economic performance. Lower commodity prices are however putting pressure on commodity exporting countries with a modestly diversified economy, such as Brazil and South Africa.

4 Investment climate Trend in EUR/USD exchange rate and fair valuation 1,6 1,6 1,4 1,4 1,2 1,2 0,8 Fair value 0, Inflation 5,0 5,0 4,0 Inflation EMU Inflation USA 4,0 3,0 3,0 2,0 2,0 0,0 0, Inflation past its peak The oil price remained below 50 USD per barrel of Brent crude last month (i.e. Below the bottom of our price range of USD). Attempts by OPEC to curb production are being undermined by growing production in other countries, for example shale oil in the US. On the other hand, global stock building has reduced sharply. With the exception of the UK, general inflation everywhere appears to be past its peak. Euro area inflation has fallen to 1.3%, and in the US it is down to 1.6%. Inflation rose at the start of this year due to higher energy prices, but that effect has now disappeared. There is also a complete absence of wage pressure, despite the good economic outlook and low unemployment rate. Normalisation of monetary policy Following on from the Fed in the US, central banks elsewhere are now also hinting at the finite nature of their accommodative monetary policy. For example, in a recent speech, the President of the European Central Bank (ECB), Mario Draghi, revealed a slight change of tone in favour of a slightly less accommodative policy. However, the ECB has not yet announced any tangible measures. Despite this, the speech had a dramatic effect on the financial markets, pushing the euro to its highest level for a year and causing an uptick in interest rates. We think the Fed will raise its key rate once more this year, and will also begin offloading its balance sheet. It is estimated that the effect of this will be equivalent to an interest rate hike of 25 basis points. We think there will be a further three interest rate hikes in These have not (yet) been priced in by the financial markets. In the UK too, the Bank of England is slowly moving towards raising interest rates. Such a move could help stem the rising inflation, but could also have a negative impact in view of the slowdown in growth.

5 Portfolio allocation Equity and bond returns for the past year Equities Bonds in euros Allocation Change Benchmark Equity exposure 37.50% 2.50% 30.00% Bonds 52.50% 0.00% 70.00% Real estate 0.00% 0.00% 0.00% Alternative investments 3.00% 0.00% 0.00% Cash 7.00% -2.50% 0.00% Overall portfolio Equities rise further above the standard level The general climate remains positive for equities. The economic picture worldwide looks rosy, especially now that the improvement in the confidence indicators is starting to be confirmed by the hard economic data and the improvement is spreading to the emerging markets. The earnings outlook for 2017 is strong. Central banks are continuing to support economic growth with their low key interest rates and quantitative easing programmes. Against this backdrop, equities will continue to outperform bonds and there will be no interruption in their current upward trend. There are likely to be some corrections along the way, but as long as the trend remains positive, a correction will actually present an opportunity to build up equity holdings. We are increasing the portfolio weighting of equities by a further 2.5%. Large underweighting of bonds The current yield remains very low. The risks facing bond investors are unequally distributed. The unduly limited or even non-existent interest compensation means that the buffer is too small. Any rate rise will be enough to push returns into the red. Put cash to work We are spreading our cash holdings across the euro, in particular, as well as other currencies offering higher interest compensation.

6 Bonds portfolio Yield spread between government and corporate bonds in the euro area AAA AA A BBB Allocation of Bond Portfolio Allocation Benchmark By Currency Euro 69.65%.00% USD 12.45% 0.00% Other 17.90% 0.00% By Bond Type Euro Sovereigns 18.30% 70.00% Euro Corporates 45.40% 30.00% Emerging Markets 9.10% 0.00% Others 27.20% 0.00% Bond investments far below guideline weight Selective approach to bonds Despite the recent rise in rates, bonds still offer little, if any, yield. Any rate spike will therefore immediately translate into very low or negative bond yields. We are avoiding high concentrations in low (and sometimes negative) yield government bonds and are only investing in bonds with a short remaining term to maturity and, therefore, low interest rate sensitivity. Corporate bonds offer slightly higher returns but also tend to be more expensive. High-interest bonds issued by quality debtors offer better prospects. High-interest bonds from quality debtors High-interest bonds offer an extra return of 0.5% or more on top of the German rate and are issued in both emerging markets (India, Poland, etc.) and mature markets (US, Norway, etc.). Gains are possible if undervalued currencies appreciate and the euro exchange rate depreciates further. However, investors must take account of the greater volatility of these markets. Good diversification is important: various countries, various currencies and various issuers of bonds. Focus on the quality of the issuer: a credit rating of BBB- or above indicates a sufficiently acceptable level.

7 Equity portfolio European equities versus US equities 280 American equities Eurozone equities in euros, index = -6 years Allocation of Equity Portfolio Allocation Benchmark By Region Eurozone 43.43% 37.00% Rest of Europe 7.62% 8.48% North America 32.43% 38.19% Pacific 6.88% 8.44% Emerging Markets 9.64% 7.89% By Sector s 22.86% 26.90% Cyclicals 45.36% 45.14% Energy 8.45% 5.72% Financials 23.33% 22.24% Equity investments are above the guideline weight Bringing stability to the portfolio Companies offering high profit distribution in the form of high dividends are at the heart of the portfolio because: they offer extra returns (a higher dividend); these are mature businesses with lower market sensitivity; they are less volatile than traditional equities, an aspect that offers downside protection. Family-led businesses also offer stability in the medium term. Seeking growth We opt for healthcare, a defensive growth sector. The solid company fundamentals, the development of large numbers of new medicines and the cheap valuation mean the healthcare sector offers significant return potential. We place our emphasis on Germany, which is a strong growth country whose highly export-driven economy is benefiting from accelerating global economic growth. The German stock market is also relatively inexpensive. Asian emerging markets also deserve to be included in the portfolio. The economic picture is brightening thanks to China s growth and strong earnings growth is expected in Asian emerging markets performance has also strongly lagged global market performance during the last few years and are cheaply valued.

8 Opportunities Short-term themes Within the equity component Emerging markets in Asia Lagging behind and inexpensive Clearing economic skies in the wake of China Robust earnings growth expected in 2017 Germany Engine of the euro area. Benefits through exports from accelerating world growth. Attractive valuation. Health Care sector with stable income flows. Potential for robust growth due in part to the biotech segment. Healthy companies whose shares are fairly priced.

9 Opportunities Medium-term themes Within the equity component High-dividend shares Stability through high current return and low market-sensitivity. High profit distributors are mature, well-managed businesses. Unique investment process that gives sectors a neutral weighting, ensuring that growth potential is maintained and sensitivity to interest rates reduced. Within the bond component High-interest bonds in local currency Quality debtors from developed and emerging countries. High coupons. Undervalued currencies could lead to exchange rate gains. (-) Currencies offering a higher return often entail a higher risk, which makes this bond theme more volatile. Family Enterprises Place emphasis on value creation in the long term. Have pricing power. Opt more often for organic rather than external growth, which usually generates better financial results.

10 This document is a publication by KBC Asset Management NV (KBC AM). The information in this document can be changed without notice, and offers no guarantee for the future. Nothing in this document may be reproduced without the prior, express, written consent of KBC AM. This information is governed by the laws of Belgium and is subject to the exclusive jurisdiction of its courts. KBC Bank Ireland plc is regulated by the Central Bank of Ireland.