KBC investment strategy presentation - DECEMBER 2014
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KBC investment strategy presentation very dynamic DECEMBER 2014
Investment strategy Very Dynamic
Investment climate
Key rate trends and outlook World economy recovering at different speeds
2,0 2,0
Anyone following the economic news is apt to get caught up in doom-mongering. The
US world economy is, however, in (much) better shape. The economic risks (at world level)
1,5 EMU 1,5
have in fact come down sharply in recent months.
1,0 1,0 • The world economy continues to recover, but at differing speeds in the various regions.
• The Anglo-Saxon countries are experiencing near-boom conditions.
0,5 0,5 • Thanks to a strong job market and buoyant business and consumer confidence, the
recovery in the US is firmly on track.
0,0 0,0 • The expansion also remains intact in Asia.
11-2010 11-2011 11-2012 11-2013 11-2014 11-2015 • But Japanese GDP has shrunk for two quarters in a row. Consumption has barely
recovered since the increase in sales tax in April.
• In the euro area the recovery that got under way in the middle of last year has lost
Ten-year interest rate developments and prospects
some steam.
4,5 4,5
4,0 Ten-year interest rate US 4,0
We are however assuming that the picture in the coming months will improve thanks
Ten-year interest rate germany to:
3,5 3,5
3,0 3,0 • the substantial weakening of the euro, which should enable the European export
2,5 2,5 engine (and especially export-oriented Germany) to pick up again;
2,0 2,0 • declining government austerity: the drag exercised by austerity measures on the
1,5 1,5 economy will be half that in recent years;
1,0 1,0 • the sharp decline in oil prices, which should give consumers in particular room for
0,5 0,5 manoeuvre;
11-2010 11-2011 11-2012 11-2013 11-2014 11-2015
• the recovery potential of corporate earnings. These have lagged behind
considerably and can benefit from the global recovery and the weaker euro.
Inflation remains low
Inflation figures remain very low throughout the world and are even falling slightly.
In particular the total figure is dropping; underlying inflation remains on track (including in
the euro area). We do not therefore fear a ‘deflation scenario’.Investment strategy Very Dynamic
Investment climate
Trend in EUR/USD exchange rate and fair valuation Oil prices continue to come down
The present weakness of inflation is due to a severe supply shock in the oil market.
1,6 1,6
• Despite the geopolitical tensions in oil-producing areas, oil prices have been
1,4 1,4 plummeting. This is not because the demand for oil is very weak but because supply is
rising much more strongly than anticipated (especially in North America).
1,2 1,2
• Lower oil prices are good news. They provide households and businesses with
1,0 Fair value 1,0 lower energy bills and therefore greater purchasing power. The central banks too are
consequently under less pressure to scale back their stimulatory policy.
0,8 0,8 • The expectation is that the OPEC countries will try in the months ahead to slow the
Q4 1999 Q4 2002 Q4 2005 Q4 2008 Q4 2011 Q4 2014 price fall by means of production curbs. Much will depend on the stance taken by
heavyweight Saudi Arabia, which so far appears to have little inclination to cut back.
Inflation
Monetary policy on divergent paths
5,0 Inflation EMU Inflation US 5,0 Over the past month the monetary policy of the various major central banks diverged for
3,5 3,5 the first time:
2,0 2,0
• The Fed has now officially terminated its third quantitative easing programme.
• That same day the Japanese centrale bank (BOJ) did exactly the opposite. After
0,5 0,5
grappling for years with the spectre of deflation, it unexpectedly announced a further
-1,0 -1,0 relaxation of its monetarypolicy.
-2,5 -2,5 • The ECB has begun implementing the announced measures.
11/2008 11/2010 11/2012 11/2014 • The Chinese authorities have also announced new support measures.
The divergent monetary policies will lead to a further firming of the dollar.Investment Strategy Very Dynamic
Portfolio allocation
Equity and bond returns for the past year Good reasons to build up the share position still further
110 115
• Although the euro area is lagging behind somewhat, the global macroeconomic situation
Bonds Equities is clearly improving. This is supporting share prices.
110
105
• There are enough elements to expect a recovery in the euro area in the coming
105
100 months as well.
100 • The trend of positive corporate earnings is being confirmed.
95 • The third-quarter results in the US (+9.2% earnings growth as compared with last
95
year) and in the euro area (no less than 13.2% earnings growth) easily exceeded
90 90 expectations.
11-2013 02-2014 05-2014 08-2014 11-2014 • Analysts are expecting corporate earnings to recover further in the coming months
in euros, index 100 = -6 months as well. Europe has the potential to close the large gap on the US. Scope for positive
surprises?
• Shares are not expensive. Price/earnings ratios are below (in the euro area and Asia) or
Very dynamic Allocation Change Benchmark at most equal to (in the US) the historical averages.
Equity exposure 80.00% 2.50% 75.00% • The very low returns on other types of investment automatically lead investors to
Bonds 10.00% 25.00% shares: there is little or no alternative.
Real estate 2.00% 0.00%
Avoid bonds: real estate is an alternative
Alternative investments 1.50% 0.00%
We remain significantly underweight in bonds. Both indirect (e.g. funds investing in real
Cash 6.50% -2.50% 0.00%
estate shares) and more direct property investment (such as funds participating directly in
real estate projects) remain an interesting alternative.
Avoid the euro
• We are scaling back our cash deposits in USD (partly) and in euros (in full) in favour of
shares.
• We are spreading our cash position over currencies offering higher interest and/or
currencies which we expect to appreciate against the euro (especially the USD).Investment strategy Very Dynamic
Bond portfolio
Yield spread between government and corporate bonds in the euro Bond investments far below the standard level
area
AAA AA A BBB
Bond yields normalising in the medium term
600 600
• Caution is the order of the day. In view of the current low levels, even a slight increase
400 400
in interest rates could result in a low or negative return on bonds.
• We avoid large concentrations in low-yield currencies.
200 200
Companies are healthy, but corporate bonds are also becoming expensive
0 0 • World growth is continuing to pick up in 2014. This would normally result in lower risk
11/2009 11/2010 11/2011 11/2012 11/2013 11/2014 premiums on corporate bonds.
• Current yields have fallen to very low levels, which means sensitivity to any rise in
interest rates is very high.
Allocation of bond portfolio
Allocation Benchmark
Away from the euro, towards the USD and emerging country currencies
by currency
• The growth of the US economy is stronger than that of the euro area. The
Euro 74.20% 100.0% accommodating monetary policy in the US is gradually being scaled back, in contrast to
US Dollar 7.10% 0.00% that in the euro area. This argues in favour of the US dollar. Long-term investments in
Other 18.70% 0.00% US dollars ought, however, to be avoided.
• The emerging markets can benefit from the improved global climate.
by bond type
• The robust fundamentals of most emerging market countries (low debt levels,
Euro Sovereigns 44.70% 70.00% limited inflation, world’s strongest growth, etc.) will attract renewed attention as a
Euro Corporates 28.50% 30.00% consequence.
• In addition to an appreciating currency, we want to benefit from the high current yields
Emerging Markets 20.90% 0.00%
these markets offer.
Others 5.90% 0.00% • Investors must take account, though, of the greater volatility of these markets.
Effective diversification remains important.Investment Strategy Very Dynamic
Equity portfolio
European equities versus US equities Equity investments are far above the norm.
280 280 Equities offer the best prospects of return in the longer term. We are investing above the
US shares European shares
250 250 benchmark level.
220 220
190 190 Bring stability to the portfolio
160 160
Companies that distribute a high proportion of their profits (a high dividend or share
130 130
buybacks) form the core of our portfolio because:
100 100
70 70
• they offer extra return (a higher dividend; the same profit is divided over a smaller
11-2009 11-2010 11-2011 11-2012 11-2013 11-2014
number of outstanding shares);
• these are mature businesses with lower market-sensitivity;
in euros, index 100 = -6 years
• they are less volatile than traditional equities, which offers downside protection.
Family-led businesses also offer stability in the medium term.
Allocation of equity portfolio
Allocation Benchmark Seeking growth
by region • We are opting for cyclical sectors, which are generally more cheaply valued than the
Eurozone 39.70% 37.10% defensive sectors and able to benefit greatly from the recovery of the global economy.
• We are placing the emphasis on regions with strong economic growth and attractive
Rest of Europe 7.70% 8.60%
valuations. This means in particular Asia and Germany (the engine of the European
North America 37.50% 38.70% economy).
Pacific 4.30% 8.20% • We are also tapping into the fastest growing regions indirectly via global leaders. These
are companies that are active worldwide and so benefit strongly from the growth in Asia,
Emerging Markets 10.80% 7.40%
as well as from the buoyant economic conditions in the US. Furthermore, the European
by sector players in this theme obtain an additional benefit from the strong US dollar/weak euro.
Defensives 23.40% 29.30%
Cyclicals 46.00% 40.70%
Energy 7.70% 7.90%
Financials 22.90% 22.10%Investment strategy Very Dynamic
Opportunities
Short-term themes
Technology sector Emerging market bonds (in local currency)
• The broad technology sector is not expensive. • Robust economic fundamentals: high growth and low debt.
• Technology benefiting from economic recovery. • High coupons.
• Profit forecasts for technology are being upgraded. • Undervalued currencies could lead to exchange rate gains.
Global Leaders Germany
• International sales diversification is necessary for growth in the medium • ‘Best pupil in the EMU class’
term. • Accelerating exports.
• Tapping into the acceleration of growth in the US & emerging markets. • Attractive valuation: fallen behind and cheap.
• Stronger US dollar provides tailwind.
Emerging Asia
• The fastest-growing region is moving up a gear.
• Growing corporate earnings.
• Attractive valuation.
USD Corporate Bonds
• Corporate spreads benefit from stronger world growth.
• Corporates have healthy fundamentals.
• Yield pick-up versus safe haven bonds.
• There are solid grounds for expecting the dollar to strengthen against the
euro.Investment strategy Very Dynamic
Opportunities
Medium-term themes
Companies with a high payout ratio: High dividend shares / Buyback
• Stability from a high current return and low market-sensitivity.
• High profit distributors are mature, well-managed companies.
• The unique investment process (sector neutrality) ensures the preservation
of growth potential.
Family Enterprises
• Place emphasis on value creation in the long term.
• Have pricing power.
• More frequently opt for organic rather than external growth, which on
average generates better financial results.
High-yield bonds in local currency
• Quality debtors from developed and emerging countries.
• High coupons.
• Undervalued currencies could lead to exchange rate gains.
Real estate
• Alternative to a direct investment in real estate (bricks and mortar).
• Attractive dividend yield.
• Interesting solution in times of low interest.Investment strategy Very Dynamic
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
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