Transcript
Page 1: exploring new facets - ABN AMRO · 2017-02-24 · Exploring New Facets Exploring new facets “Exploring new facets of risk mitigation and return, beyond the consensuewsvi ” After

exploringnew

facets

Investment Outlook June 2016

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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

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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

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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.

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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

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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

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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.

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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.

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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

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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.

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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

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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

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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

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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

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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

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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.

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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

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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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DisclaimersGENERALThe information provided in this document has been drafted by ABN AMRO Bank N.V. and is intended as general information and is not oriented to your personal situation. The information may therefore not expressly be regarded as a recommendation or as a proposal or offer to 1) buy or trade investment prod-ucts and/or 2) procure investment services nor as an investment advice. Decisions made on the basis of the information in this document are your own respon-sibility and at your own risk. The information on and conditions applicable to ABN AMRO-offered investment products and ABN AMRO investment services can be found in the ABN AMRO Investment Conditions (Voorwaarden Beleggen ABN AMRO), which are available on www.abnamro.nl/beleggen.

Although ABN AMRO attempts to provide accurate, complete and up-to-date information, which has been obtained from sources that are considered reliable, ABN AMRO makes no representations or warranties, express or implied, as to whether the information provided is accurate, complete or up-to-date. ABN AMRO assumes no liability for printing and typographical errors. The information included in this document may be amended without prior notice. ABN AMRO is not obliged to update or amend the information included herein.

LIABILITYNeither ABN AMRO nor any of its agents or subcontractors shall be liable for any damages (including lost profits) arising in any way from the information provided in this document or for the use thereof.

COPYRIGHTS & DISTRIBUTIONABN AMRO, or the relevant owner, retains all rights (including copyright, trademarks, patents and any other intellectual property right) in relation to all the information provided in this document (including all texts, graphic material and logos). The information in this document may not be copied or published, distrib-uted or reproduced in any form without the prior written consent of ABN AMRO or the appropriate consent of the owner. The information in this document may be printed for your personal use.

US SECURITIES LAW DISCLAIMERABN AMRO Bank N.V. (‘ABN AMRO’) is not a registered broker-dealer under the U.S. Securities Exchange Act of 1934, as amended (the ‘1934 Act’) and under applicable state laws in the United States. In addition, ABN AMRO is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the ‘Advisers Act’ and together with the 1934 Act, the ‘Acts’), and under applicable state laws in the United States. Accordingly, absent specific exemption under the Acts, any brokerage and investment advisory services provided by ABN AMRO, including (without limitation) the investment products and investment services described herein are not intended for U.S. persons. Neither this document, nor any copy thereof may be sent to or taken into the United States or distributed in the United States or to a US person.

OTHER JURISDICTIONSWithout limiting the generality of the foregoing, the offering, sale and/or distribution of the investment products or investment services described herein is not intended in any jurisdiction to any person to whom it is unlawful to make such an offer, sale and/or distribution. Persons into whose possession this document or any copy thereof may come, must inform themselves about, and observe any legal restrictions on the distribution of this document and the offering, sale and/or distribution of the investment products and investment services described herein. ABN AMRO can not be held responsible for any damages or losses that occur from transactions and/or services in defiance with the restrictions aforementioned.

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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Europe

ABN AMRO MEESPIERSON

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[email protected]

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ABN AMRO PRIVATE BANKING

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CHANNEL ISLANDS

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[email protected]

The Investment Advisory Centres are built around the work of investment specialists who provide financial advice and support for your key invest-ment decisions. These specialists are assisted by a dedicated team of research & strategy analysts who provide in-depth coverage of the major financial markets and investment categories – currencies, equities, bonds and alternative investments. For all enquiries, please contact one of the branches above.

If you are interested in our Private Banking iPad Research app, please send an email to [email protected].

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ABN AMRO PRIVATE BANKING

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