Robeco’s five-year expected returns report – a well-regarded annual outlook for markets and investment opportunities – which this year came to 120 pages – is not a light read. The latest report, published last week, with a world full of uncertainty, was particularly dark.
Lukas Daalder, The Netherlands-based Robeco executive director and CIO of investment solutions, spoke to the report, entitled “It’s Always Darkest Just Before the Dawn”, in a series of meetings in Australia last week. He said: “It’s not only with respect to the markets, but also with economies; people are hesitant to take a strong view. There is a lot of pessimism out there.”
A lot of investors, including two-thirds of a recent audience addressed on the subject, see yields staying low for “decades”. Some, even in Europe, say they may go lower than this, Daalder said.
The report says: “On the one hand, this pessimism is a risk in itself. There is plenty of self-reinforcing momentum embedded in the way economies work, which means that a move in one direction is not easily reversed…
“On the other hand, one can argue that this is the best medicine out there: once expectations are this poor, the threshold for surprises on the upside is very low. Stock markets normally hit bottom when things are bleakest. If earnings evaporate, companies collapse, people get fired in their thousands and there is talk of the ‘end of capitalism as we know it’, that’s the time when the market turns. The bad news continues to dominate for months but stocks move higher as the market is already discounting [the bad news]. The bleaker the expectations, the better the odds that the surprise will be a positive one.”
Robeco believes, notwithstanding all the pessimism, that “gradual normalization” is the most likely outcome.
“Call us optimists if you like,” the report says, “but one fact overlooked by many is that, despite low growth, labour markets have strengthened, with unemployment rates in all of the leading economies currently below their long-term averages. In this scenario consumers whose disposable income has been boosted by the drop in oil prices are expected to play a central role, as the balance sheets of the household sector have generally improved.”
It’s five-year predictions for five major global asset classes are, compared with last year’s report, showing three asset classes improving slightly and two going further backwards. They are: high quality government bonds down from minus 3 per cent to minus 3.5 per cent; cash down from 1.5 per cent to 0.75 per cent; investment grade credit up from minus 1.75 per cent to minus 1.25 per cent; high yield bonds up from 0.5 per cent to 1 per cent; and, developed market equities up from 5.5 per cent to 6.5 per cent.
The report is not as optimistic for the emerging markets, largely because it believes the Chinese economy will continue to weaken. “On balance, we are more constructive on emerging market bonds, as emerging market currencies are trading at a discount on a purchasing power parity-based valuation metric.
In Australia, Robeco has two funds, both of which have outperformed the average since inception: an “emerging conservative” fund and an unconstrained Poston Partners “global premium” fund.
* Greg Bright is publisher of Investor Strategy News (Australia)