Expected Returns | Institutional Masterclass

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  • 47 mins 31 secs

In this Institutional Masterclass on expected returns, a panel of experts from Robeco discuss their outlook for global bonds, productivity growth, their approach to investments, their outlook for inflation and emerging markets.

On the panel are:

  • Lukas Daalder, CIO Investment Solutions
  • Mark Glazener, Managing Director, Head of Global Equities
  • Kommer van Trigt, Head of Global Fixed Income Macro

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PRESENTER: Hello and welcome to Masterclass. I’m Mark Colegate and in this programme we’re taking a long-term view on equity and bond markets. Robeco has just published its five-year forecast of expected returns for the major asset classes and markets, and to discuss those findings I’m joined now by three of the most senior members of their asset management team. Let’s meet them. They are Lukas Daalder, CIO of Investment Solutions; Mark Glazener, who’s head of Global equities; and Kommer van Trigt who’s head of Global Fixed Income, Macro.

How do you use this at Robeco; there’s a lot of work’s gone into it?

LUKAS DAALDER: Sure, we initially started this sequence because it’s the fifth time that we’ve published this report. Initially we started it for our institutional clients to help them think of how to invest for the future. It’s pension funds, they don’t invest rapidly, they have an investment plan for the year and then they stick to that, so this is a starting point, but at the same time we also use it as our own benchmark. We manage the multi-asset funds within Robeco, and there you also take the longer view of what should you expect with returns, with respect to the returns for the various assets, so it’s for us also a bit of a benchmark.

PRESENTER: Now it’s subtitled ‘It’s always darkest just before the dawn.’ Are you implying that perhaps the markets as a whole are a bit more pessimistic than you are?

LUKAS DAALDER: Well it’s not the markets, it’s what – my experience with talking to clients over the past six months has been that everybody’s pretty negative. So the expectations for the future are pretty low. If you look at growth, if you look at returns, everybody seems to be thinking that we’re stuck in this ongoing stagnation: growth will continue to decline, productivity is not going to come back. And that’s feasible. So I’m not saying that it’s impossible. We work with three scenarios. One of the scenarios is indeed such an outcome. But my feeling is that everybody’s too much stuck in OK what we’ve had over the past five years we’re going to see the next five years, which means lower growth, even lower inflation, and that’s a bit of a, why we came up with the title ‘It’s always darkest just before dawn’.

PRESENTER: Well, Mark, from the equities’ perspective, do you go along with that? And is five years the right timeframe to be making your decisions when it comes to your equity portfolio?

MARK GLAZENER: Well, for our funds that we manage within the global equity team, the investment horizon is three to five years. So this shows as an excellent background to that investment horizon. And that of course is very company specific and the company specifics come into that, but this gives, yeah, a sort of dot on the horizon where you can see where macro interest rates etc. where they go to, so it’s an excellent framework.

PRESENTER: And just picking up on Lukas’ point there that the next five years may very well not look like the five we’ve just had. What sort of triggers do you potentially see on the horizon that will have a big impact on equity markets?

MARK GLAZENER: Well for the past five years it hasn’t been that bad. I mean you have above average returns in equity markets. This year is a bit meagre, but the years before they were excellent. Going forward what we see is indeed moderate growth. We see that the cycle has progressed, so the profit margins have been extended. They are at a higher level now, so they can decline over time. At least in the United States, in Europe and emerging markets we’re a bit more positive on these profit margins.

PRESENTER: OK, thank you for that. And Kommer, from your point of view, what do you see the outlook being for global bonds?

KOMMER VAN TRIGT: Yes, in line with what Mark was saying the other moment, also for our asset classes actually the returns have been maybe surprisingly to some good; also this year year-to-date good returns. And obviously yes there are challenges in the fixed income market, given the low yield levels around us, but we’re not that pessimistic. We are still constructive as long as you have a global universe, as long as you have a flexible investment style and as long as you are benchmark unaware that can really help the coming period.

PRESENTER: One of the things we’re hearing a lot about in the markets is are we on the cusp of moving from huge sort of monetary stimulus to fiscal stimulus by governments around the world, be it the States, in Europe. What’s your sort of, how do you think about that as an issue? How does that affect how you run?

KOMMER VAN TRIGT: Yes for sure it has become a theme also for markets. For some time we saw especially longer dated bonds coming under pressure because of this theme. We have to wait and see. Obviously the UK could be one of the first countries to go ahead with it. Maybe in November we get more clarity on that. In the eurozone, it does look a bit more complicated to us, and also in the US it’s not a clear-cut case for us that it will be with us. Maybe Japan would be a good candidate. Obviously there the policy framework has just been looked upon, and it looks like it is invented almost for more fiscal stimulus for the right road.

PRESENTER: All right well so keep an eye on that. Now, just coming back to those scenarios you mentioned there, Lukas, what’s the sort of the core, certainly because you’ve got a number of scenarios in this, but what’s the core thing, the thing that you’re thinking is most likely to happen?

LUKAS DAALDER: Most likely to happen and to that we attach 60% likelihood is gradual normalisations, so we don’t expect any miracles in 2017. We don’t expect inflation to jump higher all of a sudden. But if you see the same sort of growth that you’ve seen over the past couple of years, this is going to lead to a tightening in labour markets. Especially it starts in US. The US is ahead of the curve with respect to this development. If labour markets continue to tighten, at one point you’re going to see wage growth. And if you see wage growth then finally you’re going to see some inflation as well. But, again, we have been, if you look at the latest statistics it’s not forthcoming, so wage growth has been pretty absent. There was a bit of an uptick. So far there’s no rush, there’s no, as I said, 2017’s probably too early to expect a normal situation again, but the underlying trend is one towards gradual normalisation.

PRESENTER: And that base case, how different is it from the base case you had in this report same time last year?

LUKAS DAALDER: Well we changed the likelihood. So we’ve reduced our likelihood. Last time we thought, OK, to 70% likelihood that this is going to happen. We’ve lowered that so basically I think, one key reason for that is the political uncertainty. So Brexit was a surprise for us but if you see the populism around the world, the US elections, we have elections in Germany and France, those are all uncertainties that should be accounted for somewhere, so that’s why we increase the likelihood of, or decreased the likelihood of our baseline scenario.

PRESENTER: And very quickly, what about the other two scenarios – talk us through those?

LUKAS DAALDER: The risk of a negative scenario are clearly there. They’re multiple things that you can point towards. You have the debt situation in China, very high debt. You have indeed the populism vote, so there’s always the risk that there’s going to be an election outcome that’s not going to be happy. You have corporate debt in the US, which is normally seen as late cycle. So those are all risks that can play a negative role. In which case you are going to see more of the same, indeed lower growth and then you get the stagnation scenario.

PRESENTER: What’s the percentage likelihood you’re putting on stagnation?

LUKAS DAALDER: We’ve increased that from 20 to 30%, and then the remaining 10% is of a more positive growth.

PRESENTER: Talk us through can’t, because you can’t leave us on a downer.

LUKAS DAALDER: More positive growth. Yes well that would be that, well normally if you look at the productivity cycles they don’t go smoothly, so it’s not like productivity continues to develop in a straight line; it normally goes with bumps and speeds. So we have had a period of low productivity growth. You can also imagine that you now get a five-year of high productivity growth. Think of the self-driving car, the developments in medicine, DNA sequencing, these are all potential high growth areas. And you can think of scenario that this comes to the fore and then you get a higher growth environment.

PRESENTER: But very quickly when we’ve been seeing a lot of productivity growth recently, it hasn’t translated into wage growth.

LUKAS DAALDER: No, correct.

PRESENTER: So is that going to change?

LUKAS DAALDER: Well, again, so far, five years ago we started of course with a labour market which was abundant with labour: people were looking for jobs. We are currently at a level that this abundancy has gone. If you then see continued growth, and that’s a prerogative, so you need to have that growth, then you come to a situation where you have tightness in the labour market and then you get wage growth.

PRESENTER: So hopefully they’ll be some of that kicking into economies…

LUKAS DAALDER: I hope so but again you should also take into account that’s more for the US, less so for Europe and even less so in Japan. So that’s the order of things. The development should take place first in the US.

PRESENTER: Thank you for that. I wanted to look a little bit, well you’ve got the five-year view but also where valuations are today. Kommer, if I could come to you first. Where do you see the value in global bonds and which parts of the market do you think are looking a little expensive?

KOMMER VAN TRIGT: Yes obviously there’s a lot of talk about government bond yields being as low where they are currently, and even for us it’s difficult to scream out that there’s great value in them. That I think we’ll touch up on later on the role government bonds, core government bonds still can play in a portfolio. But this global fixed income market is way more developed than 30-40 years ago. You’ve got new segments like emerging credits, bonds issued by banks, insurance companies that are subordinate, a lot of different segments. We actually at the start of this year have become more constructive on emerging local debt as one of the areas where value is present. But also we like in Europe subordinate bonds issued by financials. And it’s also changing through our times.

I think one of the important aspects going forward when investing in fixed income is to be dynamic. Every year there are new winners and new losers, and if you have the style that enables you to pick the winners, to avoid the losers, then it’s still possible to generate attractive returns.

PRESENTER: You talked there about emerging markets in Europe but what about US corporate debt, which is obviously a huge part of the world?

KOMMER VAN TRIGT: True, yes. Well, there as a bondholder, you should become a bit more wary, we would argue. Increasingly companies are focusing on generating shareholder value. So typically yes more and more bonds are printed just to pay out dividends, to finance M&A, especially in the US leverage is also picking up a bit. So it is a reason why actually we favour more European credits. On top of debt also, the ECB obviously is buying into this corporate bond market, which also gives you a more favourable context.

PRESENTER: Well given that backdrop, Mark Glazener, does that mean you’re a big buyer of US equities, because that…?

MARK GLAZENER: Well, it all depends on the valuation of course but if we’re talking that the animal spirits are back, that’s absolutely the case. I mean you’re seeing large takeovers and every time there is an acquisition announced it is also because the low interest rates, so you can finance them at low levels. And even these companies, they have, they take new debt on to buy back their shares. And that’s what you see in the EPS growth in the US, which over the last few years has been much better than you see anywhere else in the world. So you see it trending up off EPS, and if you look at the EPS now, it’s about 10% above the long-term trends, the ten-year average.

While you see in Europe that’s still some, at first the trend is much flatter and the other thing is that earnings are still considerably below that trend, we think. So there is some catching up to do in Europe, and there also has to be the willingness to do that in Europe to increase productivity and also perhaps to take on some more debt if you want to acquire another company. So that’s for the European companies that would be good advice I think.

PRESENTER: So, if you’re looking at Europe, do you see Europe as cheap, it’s cheaper than the US, but do you see it as value, broadly speaking?

KOMMER VAN TRIGT: Yes it value but over the last few years you haven’t seen any increase in earnings in Europe, so all the rise in markets has been on the extension of the multiple, so the multiple went higher also on the back of lower rates. So there is value but still it has to be proven. So we see indeed this year hardly any growth in earnings. Perhaps something in UK because of the lower British pound but with increasing growth, increasing nominal growth, increasing real growth, they need the operating leverage to show some more earnings in Europe.

PRESENTER: And what about when you get out of the emerging markets, where are you seeing the opportunities there?

KOMMER VAN TRIGT: Well I think emerging market is a pretty good region to invest at this moment in time. We’re seeing of course the collapse of the Russian and the Brazilian economies. They are sort of only rising now, so that is becoming better. We also see, we forecast that earnings growth in the emerging markets will be better than in the US or in Europe. And there’s one good thing. They have added enormous amount of capacity in emerging markets, mostly China, but also in other parts in emerging countries, and the utilisation rate is still pretty low. So if they can expand, they don’t have to build any new factories. So the capex investment is lower and then you get more free cash flow and free cash flow is the main driver of stock markets.

PRESENTER: This is a question for Kommer. Kommer, it’s asking you for your views on high yield. What’s your take on that? Are the rewards worth the risk I suppose?

KOMMER VAN TRIGT: If you look at the high yield universe it’s dominated by US companies issuing bonds and dollars so that is something to have in mind when considering this asset class. And it also relates to what I said earlier on that especially US companies are showing some more bias towards shareholder value. And also this market has already performed greatly this year: double digit returns. So there are names still out there that we like to buy in our portfolios. But yes it isn’t a segment where you should not invest blindly in any more. If you look at emerging local debts, from an evaluation point of view, we think that’s maybe a better investment class to invest in currently. It has been better for three years in a row, yield levels especially compared to core markets, developed markets are significant, substantial. And true headed, the fundamentals of many of these countries are still not sound, but I think also many investors got underinvested in the course of the year, and that also it was a technical backdrop for maybe good returns going forward.

MARK GLAZENER: And something gained on the currencies. So the currencies are trading below their purchasing power parity; more so than any developed currencies. So with these currencies that, if you add that to the returns that can be pretty nice.

LUKAS DAALDER: In the study we come to an evaluation of the currency of around 10% so that’s the added value that you get from investing in the emerging markets.

KOMMER VAN TRIGT: It does come with a much higher volatility added so something that we have to state clearly here that many central banks in this country has actually reacted quite prudently. They tried to defend the currency by hiking short-term rates. At that moment it caused negative capital returns. But now let’s say yes, real yields are really attractive compared to developed markets because inflation in many of these countries is coming down. Many of the central banks can cut rates in the coming period, so from a fixed income perspective that is quite interesting.

PRESENTER: From that currency side, I mean for fund managers it makes it notoriously difficult to get currency right on a five-year view. Does that problem go away? Is that a strategic approach rather than a practical?

LUKAS DAALDER: To a certain extent of course the timing, you can never be right on the timing. The thing is if you look at last year we done a study for currencies and what you will find out is that basically if we look at the base RER, which is the real exchange rate, if you look at the current valuation compared to the underlying trends and take that as a measure and plus then the development of the currencies, the next five years or the return you would have had on the currencies based on the following five years, there’s a pretty tight connection between those two. Of course it’s not perfect. There’s always a lot of noise when it comes to currencies, but as a general benchmark it’s a pretty solid outcome. So if you look at undervaluations, currently the emerging markets are undervalued, which means that in a five-year perspective you should expect at least some positive return on there.

PRESENTER: Could there be a scenario in which governments and emerging markets actually want to keep their currencies as low as possible, because otherwise there’s a danger those jobs that have been created, there’s onshoring in the States for Europe, and then they’ve got a social problem on their hands.

LUKAS DAALDER: And that’s indeed also what the difference is between a one-year and a five-year outlook. In a one-year time horizon these things, these driving forces can be more important, so they will drive into even cheaper currencies. But on a five-year basis at one point things really start to get too cheap and then the economy starts to pick up, starts to run really fast and then you see the currency lift up again. So in a five-year time horizon these kind of undervaluations normally are pretty solid with respect to returns that you’re going to get.

PRESENTER: And in this world, Kommer, of sort of supressed yields, where yields are down, to what extent is currency becoming a bigger component of the total return that you’re getting off global bonds these days?

KOMMER VAN TRIGT: Yes obviously increasingly fixed income investors might also consider open positions in currencies as a way to achieve returns. Most of our products though really want to achieve, want to aim a bond like volatility. So yes we would warn for bond products which at the end of the day actually are maybe purely driven by currency returns. But it can every now and then add performance, add returns. But there can also be years where it will be very difficult to make returns with active currency management. That is something that we have seen in the past years, many focused dedicated currency managers are not there anymore.

PRESENTER: Yes OK well very nicely put. Just bring that back to what we were talking about earlier on things like QE and so forth. What impact is that having on companies the fact we’ve had this incredibly low interest rate environment for such a long time, sort of seven years into the cycle, nobody’s really talking about recession, what sort of environment’s that creating when you go out and speak to companies?

MARK GLAZENER: Yes I mean it definitely creates an environment where the animal spirits are increasing and whereby companies now take the opportunity to acquire. Because they are in a low growth environment, so if they want to see top line growth and if they want to stimulate their earnings, they can do that with revenues synergies, cost synergies from these acquisitions, and that comes with a very, it seems to come at a very cheap price because of the low interest rates. But of course…

KOMMER VAN TRIGT: Where they’re not increasing their capex spending because that also would go along with increasing animal spirit.

MARK GLAZENER: I think that most of the capital spending of the last few years has been taking place in emerging markets, in China, and not so much in the developed markets. And it’s also a different sort of capital spending. I mean if Facebook acquires a company like WhatsApp, they acquire basically 55 people and an app for what is it, $15 billion or something like that. So that’s a different kind of investment you do. It is not a brick and mortar investment but it’s, yes, you can call it virtual investments.

PRESENTER: But, to Kommer’s point, I mean what happens if we go through this extended period where there isn’t much reinvestment in companies. I mean it might be great for dividends or whatever short term, but long-term, isn’t that company essentially rubbing out parts of its own future?

MARK GLAZENER: Yes but I mean investments come cheaply these days, either in emerging markets or in these kinds of investments that I just mentioned. And that is also why a lot of these companies generate a lot of free cashflow.

PRESENTER: But how much, I suppose there’s also the other thing is that the sort of academic evidence suggests most M&As destroy value rather than create it. So as a shareholder…

MARK GLAZENER: Also a bit of old fashioned academic research in the sense that that research that was done on huge acquisitions. What we see is mostly bolt-on, it’s 10% of their revenues, 15% of their revenues, and then you can easily integrate it into your own company. So it’s definitely not as value destroying as it had been in the past. Even, yes, from a perspective of the CEO of the company that wants to increase their EPS, if they are linked to it in their bonus schemes, they can do a lot of investments these days against higher prices because it will be EPS enhancing with these low interest rates.

LUKAS DAALDER: All right and come back on the question on capex, I think this is also a bit, the darkest before dawn, as long as we all tend to be negative or have a negative view on the role of economy then there’s little incentive to actually start investing. And if you look at the graphic on the front page of our study, there’s also this big oil tanker, wants to take a certain direction, it takes some time before it can move a different corner. And so far we have been moving on the path of low growth, low investments, but you do hope that there’s going to be a sort of an incentive that the direction will change. And if that means that for example wage growth can help consumer spending to pick up then the outlook for companies starts to improve then. They start to invest again. So that’s a bit also the darkness, the dark view that people seem to have, or the clients but also CEOs, it’s self-enhancing. So let’s hope that there’s a way out of here.

MARK GLAZENER: And there are of course areas that are attractive to invest in. For instance if you think about the transition of the energy economy investing in wind and solar as against investing in coal or oil, I mean if you want to make a transition to a new energy source then there is still a lot of investments to be made to achieve that target.

PRESENTER: Well given, I mean we touched on it as well with things like technology but given this world where there’s if you like plenty of disruptive technology out there, how does that affect how you’re investing in companies, Mark, you know, on the basis that if you want to take a three or five-year view, sometimes you must be looking at and thinking will they be round in three or five years in their current form?

MARK GLAZENER: Yes or will this company grow much faster than the rest. So there is a dichotomy between the really fast growers in that market and the ones that don’t. So there is clearly a winner versus a loser aspect in that. So yes we have to do darn good stock selection to get the right ones.

PRESENTER: Oh right and Kommer, just picking up on that side of it, are there now parts of or sectors where you’re less confident lending people money on a five or 10-year view than you would have been 10 years ago because you think what is Amazon going to do to their business model, or whatever?

KOMMER VAN TRIGT: Yes especially related to yield levels. So let’s say in the European corporate bond market, the bonds set are being bought by the ECB, the safer names, the German car manufacturers, yes these companies issue bonds at yield levels that also increasingly typically are negative. And that obviously, yes, should be a reason to be cautious and to look for those segments that do offer value.

PRESENTER: I wanted to come back on something you were alluding to a little bit earlier about which is given how supressed government bond yields, I mean negative in many cases, what’s their purpose in a portfolio?

KOMMER VAN TRIGT: Yes well I think first of all a thing that we have not discussed yet here but is important is liquidity. Especially within fixed income, year after year we do see that liquidity conditions deteriorate. We’ve just a couple of favourable months behind us. The markets’ climate has been quite friendly. But we are quite sure that if, yes, a sentiment would turn again, this liquidity theme will pop up again. And I think there still government bonds, core government bonds stand out. Also their liquidity is decreasing but not to the extent that it’s visible in other market segments.

Next to that for US treasuries, you could still imagine that they can serve a role as a safe haven in your portfolio, if let’s say, yes, the 20% scenario would materialise. Let’s say that we would get a recession in the US. And then it’s quite likely that bond yields in US could fall much further than we have seen already. The Fed could even cut rates again. So also from that angle we would argue that there is still a role to be played for core government bonds in a portfolio.

PRESENTER: And also I mean, how much further could the central bank reduce rates in somewhere like Europe? Because we keep sort of, for years we’ve been saying couldn’t go down any further, and then in the UK, they’ve gone from .5 to .25.

KOMMER VAN TRIGT: Exactly yes and what we come across a lot is that let’s say many investors judge the attractiveness of fixed income markets by looking at yield levels, and what is being underestimated year after year is the impact yield movements or spread movements can have on your returns. This year, as mentioned, returns have been quite positive, but it’s not the case that yield levels were very appealing at the start of the year. It’s just because yields move lower, spreads get tighter.

PRESENTER: So it’s a bigger impact on the price of the underlying bond, is that?

KOMMER VAN TRIGT: Exactly yes. And therefore you cannot even exclude it. Also going forward, core government bonds could make good returns. It’s still a possibility that the Bank of Japan will cut rates further. The ECB might do that as well. And the Bank of England, you mentioned yourself, they also can cut rates further; thereby also probably reducing longer dated yields.

LUKAS DAALDER: In the stagnation scenario we end up with a return of 2% for government bonds, our core government bonds. And that’s on the assumption that you really move with the whole curve down to -60 basis points in Europe. In the US you have more upsides, as Kommer mentioned, because your starting yields are higher and therefore there’s more room still for both yields to go lower, yes.

PRESENTER: But if times get really tough, I mean the assumption is that people will still want government bonds. Might they not at that point want gold? I mean if you’ve got fiat currencies and a lot of debt in the system.

LUKAS DAALDER: It can but, I mean people will start to look for alternatives, not only gold so you can see maybe cryptocurrencies or bitcoin might become interesting. I mean that’s also why I think there must be at least at some sort of level, a natural bottom in the yield curve market. If you move to -1½ at the Central Bank and do that, they can move to -2, -4, whatever. But in that case people will say OK I’m not going to put my money on the bank anymore; I’m going to put it somewhere else, put it on [unclear 29:18] or look for alternatives. Then gold is an option but cryptocurrencies are also there.

PRESENTER: I suppose one thing we’re talking about yields is what can you do as fund managers to help clients in this low yield environment. Kommer, can I come to you, I mean what is a sort of sustainable income without taking too much risk?

KOMMER VAN TRIGT: It differs for client. It has to do with risk appetite, it has to do with your universe, but we are seeing that many clients are reconsidering the way they are active at least in fixed income and, yes, we have a lot of different solutions that can be of use for different client groups. But they are free elements again as mentioned in the beginning for us stand out, and that is consider to invest globally, consider to limit the role that traditional fixed income indices are playing in your portfolio construction, and have a flexible style. And especially the index duration, you see it’s shooting up in many fixed income markets because governments are really taking an opportunity of the historical low yield levels by issuing a lot of long-dated debt, 40-year bonds, 50-year bonds, just at the moment that yields are as low as they’ve ever been.

So, yes, let’s say should at least be a reason to reconsider how you want to construct your fixed income portfolio, whether you want to just specifically move with that trend, or whether you want to make your own choices on what your benchmark duration should be.

PRESENTER: So are you increasingly prepared to be away from benchmark, or are you coming up with new benchmarks for clients to judge you against?

KOMMER VAN TRIGT: Yes, well for a couple of products we have actually have chosen to move away from benchmarks, so we have also done our own research on alternative indices, be it GDP weighted or fundamental indexation. But also they have their own disadvantages. But there are many other ways to address this issue.

PRESENTER: And we also hear on occasion that equities are a good source of income for investors.

MARK GLAZENER: The dividend yields are, yes, pretty much higher than the government yields. That’s for sure.

PRESENTER: But from your, I mean and admittedly you’re an equities man, Mark, but I mean how much extra risk are you having to take if you start putting equities in portfolios now to generate yield rather than traditional fixed income?

MARK GLAZENER: Yes I think that’s still considerable. I mean volatility in equity markets is definitely a higher than any other asset classes so you have to take on more risk. But what you see sort of bond lovers doing is that they buy equities with a high yield. So the high yielding equities for instance this year have done very well. Like US telecom or utilities all across the globe. We think that that is a bit of a treacherous strategy. We’d rather stay with the high free cashflow yields rather than the high dividend yields. So then you really generate the cash. And within utilities most of the times you don’t, do not generate any cash, and with the US telecoms you have a payout ratio which is about 100%. So when they have to start investing again, they have to lower the dividends. So we stay away from these kinds of high yielding investments.

PRESENTER: Lukas, as a product provider, I suppose there’s always tensions, but there must be times where people sort of say we could put a fabulous headline yield or return on this product; how do you work out what is long-term sustainable so that your clients don’t get a nasty surprise?

LUKAS DAALDER: Well I think that’s also part of the function of this publication that we provide a benchmark or provide some clearance on what kind of yields you should expect. So in a traditional old style mixed portfolio, people were maybe expecting 6, 7, 8%. If we look at the three scenarios in the study, we don’t get to these yields. Partly that’s because your returns are low because of the bond yields being as low. But also if you look at the more negative scenario where you see no growth, stagnation, yes, then you’re going to get hurt on your equities. So you’re not going to get the same returns that you’ve seen over the past five years. That’s something that you should be realistic about.

PRESENTER: Now one thing we’ve not seen much of in the last five years is inflation. What are your thoughts on what inflation might be in the next five years?

LUKAS DAALDER: Well I think that one of the things that we did change in our central scenario is also that we lowered our inflation expectations. So we were hoping to see inflation come up earlier and more clearly. That hasn’t materialised. We’ve seen the oil price drop. Wage growth is still, well in the US you see a little bit of it but it’s still pretty stagnant; it’s not picking up that sharply. So it doesn’t sound like a very logical thing to expect inflation to all of a sudden reappear. We do expect a pickup in inflation. So at the end of the period, at the end of the five-ear period, so not in 2017, but 2021, we do expect inflation to be around 2% in Europe and maybe 3% in the US. But that’s really back-loaded so you should not expect anything like a miracle in the first couple of years.

PRESENTER: And are you predicting that the oil price will stay lower for longer?

LUKAS DAALDER: No, I don’t think so. I mean and that’s the thing with an outlook for five years. In five years’ time, there’s a lot of, there’s not a lot of investment taking place right now, and because of that if the world economy does pick up again then you see a tightness. There are a number of things which probably Mark and also come back on if he wants to but you have of course the solar energy, you have the shale gas, so these are elements that do play a role in that outlook as well. But we don’t expect the oil to rebounce to a $100-plus barrel, no.

PRESENTER: Let’s get a sort of view on it, on equities there. I mean, Mark, where are you, are you seeing any sources of inflation? I mean not necessarily across equities as a whole but where is it potentially a problem?

MARK GLAZENER: Yes well you see sources of inflation in medical care in the US, or healthcare. And that’s also debated now with the US elections. And I think there’s a big different between true innovative healthcare and true innovative new products coming to the market, that deserve to be highly priced to gain back the investments you’ve done on it. And the EpiPens or other old fashioned products which are there for a long time, but there’s only one producer, and this producer’s starts raising this price which is I think in free pricing medicine in the US, crazy that they do that. So in healthcare there is absolutely upper pricing, inflation.

PRESENTER: And for fixed income then, obviously chunks of the fixed income market are index-linked bonds. What’s your take on them, a big asset class?

KOMMER VAN TRIGT: Yes if you would expect an imminent pickup of inflation expectations then that would be the asset class of choice. But up until now, yes, it hasn’t proven to be the right call. And we’re also hesitant to believe that that will change at short notice. If you see the unprecedented level, unprecedented amount of monetary stimulus that we have seen across the globe in recent years and the disappointing effect it has had then, that’s a reason to be cautious that it will change now all of a sudden in the coming six months. Also a country like Japan, their also unemployment is quite low and still wage inflation is not picking up. Even labour unions are hesitant to offer higher wages because they would be afraid of their job security. And yes let’s hope that indeed not Europe will go into the same direction. That it will have the same deflationary mindset that it’s definitely a tail risk scenario.

PRESENTER: I was going to say if all of you agreed that a major outbreak of inflation is unlikely, what would you say is the percentage change of deflation, of some serious deflation, I mean, or is that your stagflation scenario?

LUKAS DAALDER: That’s the stagnation, yes. Correct. Yes, no 30% so, yes. It’s a little bit higher but 30% for the stagnation and 10% for the much higher than expected, so, but that’s the baseline is 60%.

PRESENTER: OK now I’ve had another question in, so I’m going to, Kommer, you’re getting all the questions today. What are your thoughts on countries using the low yield environment to extend maturity of their debt? Is that a warning sign?

KOMMER VAN TRIGT: Well it makes complete sense from the perspective of the borrower. So I can totally understand why debt agencies of many countries, most of the countries are taking the opportunity to lock in historical low financing costs. But, as mentioned, from the perspective of the investor, yes, should be a reason to really make a deliberate decision whether you want to buy into these longer dated bond offerings or whether you make your own choices. And also on the corporate side you do see that companies are taking the opportunity to issue longer dated debt. Again, I would say as long as it is a deliberate decision to invest in these securities and it’s not driven by just following an index or investing in a tracker, then it makes sense therefore from the perspective of the pension funds if you want to hedge your liabilities, then maybe these bond offerings are a great opportunity to have mature liabilities not using interest rate swaps but cash bonds which are now being offered to the market. So it depends for every client segment but, yes, it is a reason to rethink, to reconsider, to take it seriously.

PRESENTER: All right. Now we’ve got a few minutes left and I suppose a lot of what we’ve been talking about has been around the developed markets, Europe, the US, but we hear so much about the rise of emerging markets. I mean to what extent when you’re looking at a piece like this, do you think well actually by 2021, we’ve got to factor in growing importance of what the emerging markets does for overall global outlook…?

LUKAS DAALDER: Well we looked at it specifically and the problem with emerging markets is that it’s a container. It’s a word that means too much for different things. If I look at the emerging markets there’s a whole array of different countries, China have and so Brazil and all the way back. If you look at it, the dominance of China is quite big. Has been in the past and has become more and more important also in the future. We are not that optimistic about the growth prospects of China. We do not expect a hard landing, but even, under normal circumstance, even in our baseline scenario we expect the growth rates of China to decline.

So that’s something that does not help the outlook for emerging markets as a whole. At the same time, other emerging markets, always other emerging markets that are emerging and they can pick up a bit of the pace. But given the sheer size of China, that is specifically effective that you should take into account, yes, the weakness, if you’re not optimistic about China, then the prospects for emerging markets as a whole, they are slightly, yes, clouded by the Chinese outlook.

PRESENTER: And what about the Chinese equity market, Mark, because there’s obviously the Chinese economy, a lot of state-owned enterprise, but you’ve also got some quite entrepreneurial companies there, some stuff that’s grown very quickly…

MARK GLAZENER: You have the state-owned companies and the state-owned banks etc. so they sort of dominate a large part of the equity market. But you indeed have a lot of smaller companies, or mid-size companies that are growing fast, expanding their margins and generating a lot of free cashflow. So outside the state-owned enterprise, there’s a lot to pick from in Chinese markets.

PRESENTER: And as you look at the shape of your team and as you recruit people over time, is there naturally slightly higher percentage of expertise going into some of these emerging markets, you know, as it becomes a bigger part of the global economy?

MARK GLAZENER: Yes you can say so but we work with very different nationalities within the Rotterdam office, but we also have offices around the world. And if I look back I think we hired more international characters, sorry to say, than from the continent.

PRESENTER: OK. And, Kommer, how about for you, how does, as the world become not so much about the developed world, other parts come online, how does that affect?

KOMMER VAN TRIGT: Yes, it will be very important going forward. So the short-term prospects for Chinese debt, I would also agree with Lukas, might not look that rosy but looking further outwards the liberalisation of capital markets in China will be a big thing for fixed income investors, and we have seen a comparable development when the euro was introduced and this whole euro corporate bond market came alive. A similar thing could happen once Chinese policymakers would sense it’s the right moment to open up their markets, and then you want to be there and it’s the reason indeed why we also have our own local credit analyst working, be it in Singapore, be it in Hong Kong, it’s definitely a development that you have to be engaged with.

PRESENTER: All right, thank you for that. Now we’re pretty much out of time so before we go I’d like to just get a thought from each of you. We’ve covered a lot of ground in the last 45 minutes. But if there was one crucial fact you could leave people with from your five-year outlook what would it be? Lukas, I’ll come to you first?

LUKAS DAALDER: Well I think the main takeaways that we tend to look in our rear window, or rear window, how you call it?

PRESENTER: The rear view mirror.

LUKAS DAALDER: The rear view mirror, that’s it. And so what we’ve had in the past we’re extrapolating into the future. I think the key takeaway from this study is that it can happen, sure. We see that as a scenario as well, but there’s also a lot of negativity out there. And the surprises do not necessarily have to come from the downside; they can come from the upside as well.

PRESENTER: Mark, how about you from equities?

MARK GLAZENER: Yes I have two.

PRESENTER: OK.

MARK GLAZENER: So the one is that as an active manager you have to be aware of the multi-factor investing that’s the new-new thing in investments. So if you manage portfolios you have to know how the portfolio is skewed towards value, towards momentum, towards low volatility etc. to keep the construction of your portfolio, yes, be aware of that. And one thing that we mustn’t forget is that sustainability is a very important part of investing in looking at social, environmental and governance factors for companies, you get out aspects of that company that’s normally not analysed by Bloomberg analysts or even Wall Street analysts.

So, and that can be very important and a case is for instance Wells Fargo, where our sustainability analyst looked at the Glassdoor database where people can give opinions about their own company or other companies and found that there was a pressure to sell more products to more clients. And so it’s, and warned us investors for that. So that’s a good angle that sustainability has on investing in companies.

PRESENTER: Right thank you for that. And final thought, Kommer.

KOMMER VAN TRIGT: Yes I think increasingly it will be important to have really research-driven investment process. Already mentioned that in our opinion the credit cycle is maturing, that also means that idiosyncratic risk named specific risk in your portfolios can become more important – I can still remember years where it was all about avoiding certain names that could make or break your year. And yes therefore I think it’s increasingly important to have the right resources in place to analyse companies and countries where also indeed the integration of ESG factors is increasingly of relevance.

PRESENTER: OK gentlemen, we have to leave it there. Thank you all very much indeed for joining us this afternoon. Thank you for joining us and for your questions. Just before I go, I’d like to remind you you can download the full report. It’s at the link underneath this play. There’s also available sort of summaries of the report as well; they’re available in German, Dutch, French and Spanish. From all of us here, thank you for watching, goodbye for now.