Investment outlook second quarter 2021

World economy

The first quarter of 2021 saw the start of large scale Covid-19 vaccination programs. Some countries have been more successful than others in implementing these programs. Israel, the US and the UK are ahead of the rest of the world with approximately half of their populations having received their first shot. The rest of the world lags behind. Nevertheless, expectations are that most of the Western European population will be vaccinated by this summer. The number of infections is dropping rapidly in Israel, the US and the UK, providing credible cause to assume that the vaccination programs will quickly end symptomatic Covid-19 infections. A March 2021 study of 600.000 vaccinated people in Israel confirms this assumption. This has far reaching consequences for investors, two of which we will discuss below.

First of all, there are a large number of companies that have profited from the pandemic. Work-from-home facilitators such as Zoom, entertainment companies such as Nintendo or Netflix and certain sectors within healthcare come to mind. For these companies a period of extraordinarily rapid growth or exceptionally high profits will sooner come to a close. Meanwhile, many industrial companies are approaching cyclical recovery. The outlook for the hospitality and travel sector is also improving, albeit that it may still take quite some time before borders re-open and travel starts to pick up steam.

Secondly, inflation levels are expected to increase and interest rates are rising. The global stockpile of goods and commodities shrunk last year. For various reasons, the production of iron ore, copper and so called ‘soft commodities’ such as wheat, soybeans and corn, was disrupted. The production of many industrial products, including cars, came to a standstill for prolonged periods of time. This combination of lower stockpiles and higher expected demand has led to higher prices in many cases. Higher prices lead to worries about inflation, especially with the current sharply increased currency in circulation. In light of these developments, we have taken measures in the strategies to mitigate the higher inflation risk. We have limited the duration in fixed income and are focusing mainly on shares in companies with enough pricing power to pass on the effects of inflation to the customer. Meanwhile, interest rates are up. The 10 year US treasury rate increased from 0.91% to 1.70% during the first quarter of 2021, the Dutch 10 year sovereign bond rate rose from -0.5% to -0.15%. In turn, these higher interest rates have impacted ‘growth’ and ‘quality’ stocks, which now lag behind the so called ‘value’ stocks.

Geopolitically, we are monitoring the German Bundestag elections in the third quarter of this year as a potential source of uncertainty and we continue to monitor China’s increased international assertiveness. The new US presidency since mid-January has brought new calm and less unexpected developments to international relations. Under president Biden a second domestic relief package to the amount of 1.9 trillion USD was approved. As part of this package, many Americans will receive a check for 1,400 USD per person. The US has rolled out its stimulus programs decisively, in stark contrast with the EU. The European stimulus plan of last year has yet to be deployed. We expect a stronger economic recovery in the US this year than in Europe.

In previous years, China consolidated its position as the manufacturing center of the world. In 2020, China was one of the first countries to effectively control the pandemic. As a result, Chinese industrial production was largely unaffected. But the absence of a comprehensive Chinese vaccination program in combination with a renewed market focus on the environmental impact of Chinese industries points towards lower growth in the second half of this year.

Fixed income

Our short duration impacted performance in 2020 versus the benchmark. With the current rising interest rates, this has been reversed to an outperformance. A policy of short duration is maintained. Allocation is sought mostly in corporate bonds and in diversified, solid currencies with a higher interest rate than Euro.

Equities

While our equities allocation is slightly overweight, the portfolios consist mainly of low volatility stocks. The market rotation to value stocks, which traditionally react more strongly to cyclical developments, brought significant volatility to the markets. The most successful asset managers of the last two years were often invested in companies that underperform in current market conditions; growth stocks at high valuations instead of value stocks with a cyclical upside and a reliable dividend income. If their strategies continue to underperform for the time to come, the inflow of assets may well turn in to outflow. This in turn, as a more or less self-fulfilling process, places further pressure on the strategies. We expect the increased volatility to persist for some time to come and may use the volatility to increase our equity allocation on a limited scale. Valuation of European stocks is far behind the valuation of US stocks, making it easier to find attractive investments outside of the US. We may also add limited cyclical risk in the short term, but only in exchange for an acceptable, higher return.

Our overweight position in gold is maintained. Low interest rates and the return of inflation in time should benefit the valuation of this position.