A break in the clouds - ABN AMRO · BETTER BREXIT OUTLOOK SUPPORTS THE EURO 21 CONTRIBUTORS 22 This...

Investment Outlook | 2020

A break in the clouds

2

ABN AMRO Private Banking

INTRODUCTION 3

A BREAK IN THE CLOUDS 4

SOURCES OF RETURN WHEN LOW RATES RULE 6

MAKING AN IMPACT 8

MOVING IN THE RIGHT DIRECTION 10

EQUITIES: BALANCING VIEWS 12

OPPORTUNITIES IN ENERGY STORAGE 14

BONDS: PRESSURE RISING 16

MIXED PICTURE FOR OIL AND GOLD 18

PRIVATE EQUITY: TIPS FOR UNCERTAIN TIMES 20

BETTER BREXIT OUTLOOK SUPPORTS THE EURO 21

CONTRIBUTORS 22

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


3

What a fantastic year it has been for investors! Of course the year is not over, and we all still remember what happened in December 2018. But, for now, the returns are above expectations. In all asset classes, including bonds, equities and alternatives, we have seen good results. It is a remarkable performance, and it is almost certain that investors should expect lower returns in 2020. After all, the low interest-rate environment means that bond yields, in particular, will be lower going forward.

At this time of the year, it is good to look ahead and to consider how your portfolio is prepared for what is coming. For 2020, there is a lot to look forward to. The implications of a potential Brexit, continued struggles between the US and China and, of course, the US presidential elections later in the year. And how will central banks act in the new year? Will they continue to support the economy with looser monetary conditions or will they hold their fire, afraid that too much stimulus might create too much inflation?

In this Investment Outlook, we present our views on the current economy and the way we expect it to develop in the year ahead. We look at the overall macro-economic picture and translate it into forecasts for economic growth. Within equity markets, we discuss the opportunities we see in the different regions and sectors. You will also find some investment opportunities related to renewable energy and storage. Regarding bond markets, we pay special attention to negative interest rates and what this will mean for your portfolio. Finally, we share our views on different factors that play an important role in financial markets and how they can be used in your investment portfolio.

This Investment Outlook presents the ideas of the investment specialists within ABN AMRO Bank. As such, it can be used as the starting point for a review of your own investment portfolio. Your investment advisor will gladly help you with such a review and to prepare for the year ahead.

Introduction

Richard de Groot

Global Head Investment Centre ABN AMRO Private Banking

November 2019


4

As economic growth slowed through 2019, investors feared the end of the cycle, and even the possibility of a recession. More recently, some breaks in the clouds lend support to a slightly more optimistic view.

The dependence on global trade is another way of looking

at the economy, although its importance differs by country.

The US, for example, has less dependence on global trade

than China or Germany. Nonetheless, developments in global

trade have been a major concern for investors worldwide, as

the trade war continues to dominate headlines. Even though

we hew to ‘Seeing before believing,’ there are some hopeful

signs that the trade war will at least not deteriorate further.

This is positive for global economic growth in 2020.

And different risks to keep in mind.

With manufacturing still weak, there remains a risk that

problems in the manufacturing sector could spill over. The

effect would be higher unemployment. Postponements

of investments could also eventually lead to higher unem-

ployment. This, in turn, could lower growth in the services

sector and dent consumer sentiment too.

Geopolitical risks are also lingering. The trade dispute

between China and the US could always reignite, but there

are also other country-specific risks within the US and China.

Even though we do not believe that US President Donald

Trump’s impeachment will result in his being forced from

office, the impeachment process is a distraction and could

lead to more uncertainty. Meanwhile, China is faced with

continuing unrest in Hong Kong. And, in the UK, the Brexit

saga has continued past several deadlines. Even though a

no-deal Brexit seems unlikely now, the upcoming elections

could lead to renewed concerns.

We recommend investors look at the basics of their portfolio and consider some opportunities

Investors should always keep in mind their investment

goals, their investment horizon and their willingness and


After a worrisome period, where manufacturing worldwide

hit a slump, there are slowly emerging signs that the worst

may be nearly over and that the economic cycle may be

prolonged. Recession now appears unlikely this year or next,

giving way to a period of low but positive economic growth.

Stocks and bonds had a good year in 2019. But lower inter-

est rates mean that clients may need to reconsider their

fixed income allocation. A large proportion of all outstanding

euro bonds have a negative yield, which lowers returns and

increases portfolio risk. Low bond yields also impact other

asset classes, as investors search for returns.

There are different ways to look at the global economy…

You can look at the global economy from a manufacturing

or services perspective. Normally these important segments

will be in some way aligned. For most of 2019, the manufac-

turing sector has been struggling, as increased uncertainty

has driven down investments. The services sector, however,

has been doing much better, as consumers continued to be

confident about the future and therefore continued to spend.

Slowly but surely, we believe that the manufacturing sector

will stop worsening and that it can even improve. A number

of leading indicators are stabilising and even beginning to pick

up. Lower interest rates will support further improvement. The

positive impact of lower rates is already visible in the housing

market, which, in turn, can benefit many other sectors.

The same applies for the auto industry, which has been strug-

gling, particularly in Germany. There are now signs of auto

production stabilising. That there is some improvement in the

manufacturing sector is important, as investors feared the

services segment of the economy could follow the manufac-

turing sector in its decline. For now, this looks less likely to

happen.

5


ability to accept risk. For euro-based investors, the nega-

tive return on the majority of bonds means that investors

should reconsider their allocation, as expected returns might

no longer be enough to reach their goals. Moreover, the risk

has increased, as the risk of higher rates rises.

But negative interest rates are also affecting the stock

markets. For investors searching for yield, there is no real

alternative to stocks. A dividend of 2-3% is more attractive

than negative interest rates. This has been, and will remain, a

major driver behind the strong performance of stock markets.

Our recommendations to investors

We recommend a balanced portfolio, with a somewhat

reduced allocation to bonds. Stay invested in stocks and

keep a slightly higher allocation in cash. The cash can be put

to work if the break in the clouds turns more convincing and

the outlook becomes sunnier.

Within equities, we recommend investing in health care

companies and companies within information technology.

Both sectors should do well, even in a scenario of lower

economic growth. Within regions, we have a slight prefer-

ence for the US, as it has a smaller manufacturing sector

and is less dependent on global trade. Trends in renewable

energy, in particular energy storage and batteries, will also

create investment opportunities.

Within bonds, we see opportunities in investment-grade

corporates, which have a higher return and will be supported

by central banks’ bond purchases. Emerging-markets bonds

are also an opportunity, as they should benefit from declin-

ing interest rates and lower inflation. The government bonds

of eurozone periphery countries are also attractive.

Richard de Groot

Global Head Investment Centre

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EQUITIES

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BONDS

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EQUITIES

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66

The unusual situation of very low interest rates for a long period of time is an incentive to consider different methods of asset allocation. Factor investing focuses on premiums related to value, growth or momentum, which can outperform even in a low-return environment.

For each of our six risk profiles we provide an expected return

on an annual basis. These figures answer the question “what

yearly return can I expect, on average, for the next 10 years?”

In general, these figures don’t differ much year to year, but

this year the impact of constantly decreasing interest rates

on cash and fixed income is substantial. In profile 4 (used

by most of our clients), our expectation is now 0.6% lower

per year. In the more conservative risk profiles, which can be

dominated by bonds and cash, the difference is even more.

But even in equities, low rates have already made the market

more expensive, decreasing expectations going forward.

From asset classes to factor investing

In our search for performance, can we allocate in a different

way than to the broad market? A classic allocation approach

uses asset classes: shift to equities and alternatives from

bonds and cash, for example. But in a “low-for-longer” inter-

est-rate environment, everyone will probably do this, because

“there is no alternative.” We are aware that this makes the

portfolio more vulnerable.

But there’s more than only one sort of asset allocation. In both

equities and bonds, we can focus on factors that drive market

returns. Academic research shows that allocating to these

factors can deliver premiums in excess of market returns,

even in a low-return environment. The most common factors

that investors use are value, growth, size, quality, momentum

and low risk.

Sources of return when low rates rule

Playing factors in the investment portfolio

These factors have economic rationales: either you exploit

other participants’ behavioural bias or you’re being paid to take

risk (e.g. in small-cap stocks). This suggests that factors can be

incorporated in the portfolio across asset classes. The most

familiar factor strategies, however, are implemented in equi-

ties. We already do this implicitly in the selection process in our

Classic mandate portfolio, as well as explicitly in ABN AMRO’s

Factor Mandate. There are also more and more fund solutions

available in asset classes, such as sovereign bonds and credits.

In currencies, commodities and volatility, however, the solu-

tions are still firmly in the alternatives and hedge-fund worlds.

We believe the best mainstream way to capture these premi-

ums is, for the moment, in equities, using an allocation to

factor strategies. This targets returns that, over time, system-

atically exceed the broad market benchmark. In a world

where low rates rule, every edge matters.

Paul Groenewoud – Quant Risk Specialist

Chris Verzijl – Quant Strategist

-10

-5

0

5

10

15

Nov-16 Aug-17 May-18 Feb-19 Nov-19

Growth Value Quality Low volatility

Source: FactSet

Factor performance relative to MSCI World

As of 1 November 2019

7


8


Making an impact

We all want to make a difference – to have a posi-tive effect on our family, our community and our future. Sustainable investors are already support-ing positive developments around the world. And now, given the detailed reporting that is a key characteristic of impact investing, the effects are becoming even more obvious and measurable.

Impact investments, as defined by the Global Impact

Investor Network (GIIN), are investments made with the

intention to generate positive, measurable social and envi-

ronmental impact along with a targeted financial return.

(ABN AMRO is a member of the GIIN through the bank’s

Social Impact Fund, based in the Netherlands.)

There are four key elements to impact investing, which

distinguish it from other types of sustainable investing.

According to GIIN, to qualify, an impact investment needs

to exhibit:

● Intentionality. The investment needs to intentionally

contribute to social or environmental solutions.

● Financial return. A return on capital must result, although

it can be below or above the risk-adjusted market rate.

(Investments with below market-rate returns can also be

viewed as philanthropy.)

● Range of asset classes. While originally limited to private

equity and private debt, impact investing is now legiti-

mately applied to listed equity and other asset classes.

● Measurement. The portfolio manager is required to

measure and report on the social and environmental

performance of its investments.

Impact investing in action

A look at some impact funds makes clear how their report-

ing differs from other funds. The UBS Global Impact Equity

fund, for example, has a stated goal to demonstrate a posi-

tive impact on the well-being of people and environmental

quality. The latest annual report states that the portfolio’s

investments were responsible for saving almost 12 million

cubic-meters of water, eliminating 6 million metric tons of

carbon-dioxide and extending the lives of more than 75,000

people.

Along with 129 other international banks,

ABN AMRO signed the UN Principles for

Responsible Banking in September 2019. By

signing this document, we have all committed

to aligning our business strategies with the

UN’s Sustainable Development Goals and

the Paris Climate Accord. With these banks

representing one-third of the assets of all banks

worldwide, we can make a significant impact in

the areas of climate change, human rights and

other sustainable development goals.

9


UN Sustainable Development Goals

Source: United Nations

Another example is the FMO Privium Impact Fund. The fund

is fully owned by the Dutch development bank FMO, and

it invests mainly through private loans. The fund targets a

return of 2-4% per year, and it is classed as an alternative

investment, because of a redemption period of one month.

In its latest report to shareholders, it boasted that since

inception, it has supported financing for more than 1,600

small and medium-sized enterprises; its investments helped

avoid a total of more than 18,000 tons of CO2 emissions; and

it has also generated 45.5 gigawatts of renewable energy,

providing ‘green’ power to more than 53,000 people.

The level of detail and the careful measurement regard-

ing the effects of the portfolio on the environment or UN

Sustainable Development goals (see Figure) set impact

investing apart. This type of reporting is typically missing

from other types of sustainable investments. And it is one

reason we expect impact investing, which is now a niche,

to grow. More than ever, investors believe it is important to

understand and monitor how their money is being used and

its positive effects on the world.

Richard de Groot

Global Head Investment Centre

10


Moving in the right direction

The uncertainties seen in 2019, including global growth worries, the US/China trade dispute and Brexit, will continue into 2020. But it’s not all nega-tive. There are some positive signs also appearing, related to low interest rates, Chinese stimulus and the rollout of 5G networks.

Global growth has continued to weaken. The US-China

conflict and the threat of more protectionist measures

have damaged confidence and restricted trade. In addition,

the effects of the four 2018 rate hikes by the US Federal

Reserve are still being felt. China’s deleveraging policy and

problems in the automobile sector in Germany (and some

other countries) and the uncertainty created by Brexit have

also put a brake on economic growth this year.

Uncertainties are set to continue. Even a truce between the

US and China doesn’t provide comfort that hostilities will

not re-escalate. And some new uncertainties are coming to

the fore. The impeachment process against US President

Donald Trump will catch headlines in the months to come,

as will the race for the White House.

11


Forecasts: Economic growth and inflation (%)

Source: ABN AMRO Group Economics

No deal Brexit is unlikely

It is unclear at the time of writing how the Brexit process

will evolve. Recent developments suggest that two extreme

risks to financial markets have been lessened. A no-deal

Brexit is off the table, at least for now. Equally, a single-

party majority government led by Labour’s Jeremy Corbyn

is unlikely, according to opinion polls. Financial markets

would not respond positively to such a government.

The departure of the UK from the EU, whenever and

regardless of the terms, will do damage to the UK and EU

economies. The harder the Brexit, the bigger the damage.

However, the UK can take measures to soften the blow.

First, they can allow their currency to weaken. Second,

they can follow policies that make the UK a more business-

friendly location for companies than the EU is – which might

not be very difficult. On balance, we expect a deal to be

done and the UK to leave the EU. We also expect that there

will be negative economic effects for both sides, with the

UK in a good position to ease the pain.

Some positive signs

While the outlook for the global economy is not particularly

positive, we believe there will be several factors pushing the

economy in the right direction. The Fed cut rates three times

in 2019 -- almost reversing all of the tightening of 2018. The

positive effects are clear on the mortgage market. Effects

of monetary policy actions take a while to make themselves

felt fully throughout the economy, so there is more to come

22 November

2019

GDP growth

2019

Inflation

2019

GDP growth

2020

Inflation

2020

US 2.2 1.8 1.3 2.0

Eurozone 1.0 1.1 0.8 0.8

Japan 1.0 1.1 0.4 1.6

UK 1.2 1.8 1.2 1.7

China 6.2 2.8 5.8 2.5

even if the Fed were to leave rates unchanged for a while.

The European Central Bank has also eased policy, as have

many central banks around the world.

Effects of Chinese stimulus still to come

Chinese efforts to stimulate the economy have not had the

desired result in a convincing way yet. But some measures

are starting to indicate that the effects are now coming

through. If that is so, that would be a significant positive

sign for the global economy.

A truce in the US/China conflict would, obviously, also

be positive, as it would reduce uncertainty. Logic would

suggest that President Donald Trump must be willing to

reach a deal with the Chinese and stick to it at least for some

time. The US economy is losing momentum and a further

escalation of the conflict would also damage the US, hurting

the president’s chances to be re-elected.

The inventory cycle in the industrial sector may also be

turning. Production has been weaker than final demand

globally for some time. This can’t last forever. At some

point, restocking will take place, boosting activity.

Faster internet and smartphones with 5G

Finally, fifth-generation (5G) networks, which offer faster

speeds and more reliable connections, are being rolled

out, thereby stimulating the tech industry. The technology

cycle has become increasingly important and developments

related to 5G-networks may provide an important push.

Overall, the global economy has slowed and the outlook is

for more, sluggish growth. But at least a recession is unlikely

and some moderate acceleration of growth could occur in

the course of 2020. Inflation is very low, allowing central

banks to maintain their very accommodative stances.

Han de Jong

Chief EconomistUpdates to ABN AMRO forecasts can be found at https://insights.abnamro.nl/en/

12


Equities: Balancing views

Stock market performance was impressive in 2019. Returns were largely fuelled by the U-turn in monetary policies and a decrease in politi-cal risks. Fundamentals, however, have not been equally supportive, given that a slowdown of the world economy has fed a deceleration in earnings growth. As a consequence, there are two scenar-ios for investors to consider for 2020.

On the one hand, there is the bullish view that the early

signs of stabilisation of the world economy is the prelude to

a reacceleration in the coming quarters. This would lead to

pronounced earnings growth, with analysts currently expect-

ing close to 10% in 2020. Such an environment would be

supportive for stocks with high risk premiums, while fixed

income would have low expected returns. On the other

hand, there is a more bearish view where the expectation is

that the reacceleration of the world economy is going to be

muted, with political risks remaining high in coming quarters

and generating much slower earnings growth. As a conse-

quence, monetary policy would be considered less effec-

tive, triggering a new phase of volatility for risky assets.

Starting 2020 with a neutral stance

The bullish camp has valid arguments. Stabilisation of

the world economy is being increasingly signalled and

the services sector has been resilient around the world,

supported by the consumer. It is also possible that the

US and China could find an agreement that would support

corporate confidence in coming quarters. Earnings growth

could then reach 10% next year. As a consequence, this

environment would be very positive for stocks, as this asset

class continues to be the main source for expected returns

significantly above zero. The mantra of ‘there is no alterna-

tive’ supports stocks and the possibility for positive financial

returns in 2020.

The bearish camp has also some valid arguments, which

are based on recent economic and financial develop-

ments. Despite the slowdown of the world economy and

the decrease by 2% of world earnings growth on a year-

on-year basis, stock markets have rallied substantially.

Consequently, there might be a disconnection between

market behaviour and fundamentals, materialised by higher

valuations. Currently, the price/earnings ratio of the US S&P

500 Index is around 19, which is significantly higher than the

long-term average (around 15). Moreover, all political issues

are not yet solved and US politics could be an important

theme next year. As such, it seems that there is not much of

a buffer to absorb any bad news, in particular in an environ-

ment where monetary policies are already aggressive.

We believe that both camps have sufficient valid arguments

to justify a neutral stance toward stocks going into 2020.

The next move for investors will mainly depend on earn-

ings developments. Any sustainable earnings growth would

justify considering – all else being equal –that the more opti-

mistic, bullish camp may be more on the right track than the

bearish case.

Adopt a more balanced regional allocation

This balancing act of taking a neutral stance toward stocks

is also applied to our regional and sector allocations. In

terms of regions, we decreased our strong preference for

US stocks versus Europe. We still favour the US, but to a

lesser degree. US stock markets remain in the lead in the

bull market that started in 2009, supported by stronger

earnings growth. Political risks, however, could increase

next year with the US elections in November, generating

potential risk for US stocks. It is still too early, however, to

have a clear understanding of this election and its poten-

tial impact. On the other side, political risks are receding in

Europe. A ‘hard’ Brexit, with no agreement between the UK

and the EU, seems to be definitely off the table. We remain

13


ABN AMRO sector viewneutral regarding emerging markets. Of course, in emerging

markets, absolute and relative valuations look attractive, but

the visibility regarding the Chinese economy remains low;

the US/China trade dispute is not over yet; and the US dollar

remains strong, despite the dovish US central bank.

Invest in sectors exposed to growth

We retain our preference for two sectors: information tech-

nology and health care. These sectors have delivered a

year-on-year earnings growth of 1.5% and 4% respectively,

supported by the transformation and digitalisation of the

economy and the increasing size of the ageing population.

We believe that those trends are here to stay. The main

potential risk could come from the US political situation next

year. But, as stated, it is too early to consider its potential

impact.

Regarding other sectors, the consumer staples and utili-

ties sectors are out of favour, given that they suffer from

higher valuations and are sensitive to the behaviour of inter-

est rates. Finally, we have become more positive (moving

to neutral) on the financials sector for two reasons: Any

improvement in the economic outlook would likely trigger

a tactical outperformance in financials, fuelled by low valu-

ation metrics. Structural challenges, however, remain in

place.

Olivier Raingeard

Global Head Equity

1000

1200

1400

1600

1800

2000

2200

2400

Jan-10 Apr-13 Jul-16 Oct-19

MSCI World

Source: Bloomberg

The world equity market: new highs ahead?

Sector ViewCommunications services Neutral

Consumer discretionary Neutral

Consumer staples Underweight

Energy Neutral

Financials Neutral

Health care Overweight

Industrials Neutral

Information technology Overweight

Materials Neutral

Real estate Neutral

Utilities Underweight

Source: ABN AMRO Private Banking

14


As countries and companies strive to reduce carbon-dioxide (CO2) emissions, we are hurtling towards a world where renewable energy will provide our electricity and fuel our electric vehi-cles. Energy storage therefore becomes vital, offering opportunities for investors.

The transition from fossil fuels to renewable energy is an

immense change. And it is important, as energy and heat

generated by fossil fuels are responsible for more than 40%

of global CO2 emissions. Since the beginning of this millen-

nium, the first beneficiaries of the energy transition have

been renewable energy sources, such as wind and solar.

Given that renewable energy was expensive in comparison

with fossil fuels, governments helped the market with subsi-

dies. This triggered mass production and innovation, which

caused the price of renewable energy to drop significantly.

Since 2010, the cost of electricity from wind has fallen by

49% and solar has fallen by 85%. Now, more than two-

thirds of the global population lives in areas where electricity

from new solar or wind plants is cheaper than coal and gas

plants. Just five years ago, this share was negligible.

According to Bloomberg New Energy Finance (BNEF), by

2027, building new wind and solar energy plants will be

cheaper than running existing coal plants in China. And by

2030, the gas-rich US will reach the tipping point, where

energy generated through solar and wind technologies

becomes cheaper than natural gas. It is therefore not a ques-

tion if coal and gas will be displaced by renewable energy,

but when and how.

Electric vehicles set to take off

The massive shift made by auto manufacturers towards the

mass production of electric vehicles over the past two years

is remarkable. Electric vehicles can have a serious and posi-

tive effect on climate change, as transportation is responsi-

ble for almost a quarter of global CO2 emissions, .

Opportunities in energy storage

Many governments subsidise electric vehicles in order to

promote them. We expect there to be dozens of different

types of electric autos developed for the consumer market

over the next few years. Today, electric vehicles are not

economically competitive because of the cost of the battery

pack. But with mass production, the price of batteries will

drop further.

Battery prices are dropping

After an 85% drop since 2010, battery prices are expected

to fall by half again by 2025 and to be two-thirds cheaper

by 2030. This will accelerate the sales of electric vehicles,

as they will become the cheapest option for most drivers,

even without subsidies. Between 2035 and 2040, global

electric vehicle sales are expected to overtake sales of tradi-

tional internal combustion vehicles. (See Figure.) Europe and

China will reach this point as soon as 2030.

Energy storage is next

The market for energy storage is propelled by three reinforc-

ing drivers:

● Cheap and abundant renewable energy which requires

energy storage

● As the number of electric vehicles increases and the price

of batteries declines, new energy storage markets are

created

● Government policies and regulations are providing incen-

tives for energy storage

As sources of renewable energy proliferate, more is being

connected to the electric grid. Research agencies forecast

that by 2050, 30-50% of world electricity will be produced

by renewable energy sources. This creates some specific

problems. Renewable energy is not always available, cannot

be called upon on demand and the timing of energy produc-

tion is not always aligned with demand. For example, it can

15


be that too much energy is produced when demand is low.

Stationary energy storage technology will be vital to over-

come these problems and stabilise the electric grid.

The mass production of electric vehicles and batteries is

driving down the price for energy storage. This will make

applications with batteries economically more interesting,

such as for the storage of electricity generated from solar

panels owned by consumers and businesses.

The rise in energy storage will be given an extra boost by

evolving government and climate policies. Multiple US

states have already announced targets for energy storage.

Areas with a high proportion of renewables (as in Europe),

with grid issues (Australia) or with domestic battery produc-

ers (Asia) are likely to follow. Furthermore, new regulations

and directives have been set in 2019 by the European Union

to facilitate the energy storage market.

Surging energy storage market creates opportunities

Last year, investments in energy storage surged by 45%,

according to the International Energy Agency. Already,

announced expected battery production is about 4-5-times

higher than what is available today.

The market for energy storage is expected to grow by 16%

per year throughout 2030, according to BNEF. This surge

in energy storage will benefit suppliers of battery systems,

renewable energy, energy management software, storage

services, battery components, battery recycling and infra-

structure. At the same time, it can create challenges for

utilities with sizeable fossil fuel generation capacity, fossil-

fuel equipment suppliers and coal mining & gas exploration

companies. For the oil and gas majors, disruption will not start

immediately, as for at least the next ten years, natural gas will

still have a role to play in worldwide energy generation.

Piet Schimmel

Senior Equity Thematic Expert

0

10

20

30

40

50

60

70

80

90

100

2015 2020 2025 2030 2035 2040

Electric vehicles (EV)

Internal combustion engine (ICE)

%

Source: BloombergNEF

Sales of electric vehicles are increasing

Increasing number of electric vehiclesand growth in battery production

Energy

storage

Cheap and abundantrenewables (wind, solar)

New government policies and regulations

Three factors drive the energy storage market

16


Given the negative yields seen on eurozone government bonds, we now use investment-grade corporate bonds as the core of bond portfolios. We recommend this strategy for 2020 as well. Bond investors should also be aware of the risks that come with a more turbulent environment.

Bonds have long been subdued by a cold weather system of

muted inflation, low growth and low central bank rates. For

six out of twelve eurozone sovereigns, the yield curve from

one to ten years is now below zero. (See Figure.) Coupons will

not turn negative, but a (new issue) price above par erodes

to face value when the bond matures. This is how negative

yields translate into promised negative returns.

Active investors can buy negative yielding bonds if they

believe that yields could go even lower. A temporary rise in

bond prices is locked-in if the bonds are sold before expira-

tion. This is an increasingly tricky game to play: as more yields

become depressed, there is more risk that they will rise and

then that bond prices will fall.

Balancing risks differently

Negative rates are nothing new. For some time, negative

rates have meant that the centre of gravity of bond portfolios

shifted to euro-denominated investment-grade non-financial

corporate bonds. While 60% of the investment-grade bond

index is also negative yielding, the yield pick-up of roughly

1% brings the promised return on these bonds into positive

territory.

Our main strategy has been to reduce the allocation to core

government bonds in favour of super safe and (near) zero-

return cash, as well as toward more-risky bond segments.

While this strategy remains in place, we also recommend

investors to rebalance the risks in these outer wings of the

portfolio when the opportunity arises.

Strategies for the turbulence ahead

Any rays of sunshine from the economy means that the bond

market may start to anticipate higher yields. As this occurs,

bond prices may experience some turbulence. We recom-

mend that bond investors navigate this period with four

tactics:

1. Reduce the duration of the total bond portfolio from overweight to toward neutral relative to your benchmark.

Having a longer (overweight) duration was a strategy for

an environment of declining interest rates. Now that rates

are at risk of moving higher, we prefer reducing the dura-

tion of the portfolio.

2. Keep the bond portfolio anchored to investment-grade non-financial corporate bonds. With the European

Central Bank (ECB) resuming its bond buying activity,

these bonds are well protected. At the same time, corpo-

rate balance sheets will benefit from the improvement in

the macroeconomic environment that we expect.

3. Gradually shift cash back to bonds. The reward on cash

is eroding, and we expect that bond risks will continue to

offer a return.

Bonds: Pressure rising

Country Five-year Ten-year

Germany Negative Negative

Austria Negative Negative

France Negative Negative

Netherlands Negative Negative

Belgium Negative Negative

Finland Negative Negative

Ireland Negative Positive

Spain Negative Positive

Portugal Negative Positive

Italy Positive Positive

Greece Positive Positive

Many eurozone government bonds have negative yields

Source: Bloomberg, ABN AMRO Private Banking

17


Bonds: Pressure rising

4. Diversify over different risk factors. Relative to the

country risk factor, our preference is for an allocation

to peripheral eurozone countries. These bonds are also

protected by the ECB’s buying activity. We also favour a

small allocation to emerging-market sovereign bonds in

hard currency as well as a small allocation to emerging-

markets and high-yield corporate bonds. They are not

included in the bond buying programmes of the central

banks, but our outlook favours these bonds and in the

absence of major price movements, a positive return can

be had from just holding these bonds.

In 2020, investors need to be vigilant and active around

these risks and seize opportunities as they occur while avoid-

ing potential declines in price. For 2020, bond investing has

become a much more tactical game.

Mary Pieterse-Bloem

Global Head Fixed Income

Region 26 November

2019

Year-end

2020

US

Fed (interest on excess reserves) 1.55 1.30

10-year Treasury 1.74 1.90

Europe

ECB policy rate -0.50 -0.60

3-month Euribor -0.40 -0.55

10-year Bund -0.36 -0.40

Forecasts: Interest rates and bond yields

Source: ABN AMRO, Group Economics

Updates to ABN AMRO forecasts can be found at https://insights.abnamro.nl/

18


Mixed picture for oil and gold

Two important components of the commodities sector, oil and gold, are responding to global events and longer-term dynamics with a lack of direction in their prices. Both, however, are expected to end 2020 higher.

There is a lack of direction in oil prices, and the risk premium

(as indicated by the price difference between the price

of Brent oil price and the price of WTI oil) has not picked

up significantly. This is despite the increased geopolitical

tensions between, for example, Iran and Saudi Arabia. So,

the market appears to be comfortable with the way Saudi

Aramco has dealt with the recent production outages and

the rapid restoration of its oil exports. Meanwhile, the nega-

tive effects of the US/China trade dispute on the global

economy continue to affect oil demand growth expectations.

Notwithstanding a possible truce between the US and

China, we think the trade war will continue to weigh on

economic growth. The International Energy Agency lowered

its demand growth forecasts to +1 millions of barrels a day

(mb/d) in 2019 and +1.2 mb/d in 2020, based on lower

economic growth. This should cap the potential high point

for oil prices. Higher oil production in the US also adds to a

well-supplied market.

Higher geopolitical tensions, however, could potentially

push prices higher. An even deeper production cut than

the current crude production agreement by Opec should

also provide support for oil prices. There will be meetings

in early December between Opec members and Opec and

the countries that had agreed to a production cut (led by

Russia). According to Opec Secretary-General Mohammed

Barkindo, Opec will do ‘whatever it takes’ to prevent another

oil price slump. He has hinted at a continuation of the current

production-cut agreement, which expires in March 2020, or

an even steeper production cut. Our year-end 2020 forecast

is USD 70 per barrel for Brent and USD 65 per barrel for

WTI.

Outlook for gold is positive, but first a correction

This year, gold prices have rallied by around 14%. On 4

September they set a high at USD 1,557 per ounce and

since then, prices have declined. Even though the longer-

term dynamics remain supportive for gold prices, such as

central bank monetary policy easing, more negative-yielding

government bonds and some downward pressure on the US

dollar, in the near-term, we expect some weakness in gold

prices. The main reasons for gold prices to soften is that the

monetary policy easing by major central banks has already

been reflected in gold prices.

A long position in gold is now a crowded trade (both in the

futures market and with exchange-traded funds). Without

a further rally, investors will likely take profits on a portion

of their positions. This will result in some near-term price

weakness. For 2020, we are more optimistic on the outlook

for gold prices if a considerable amount of the long posi-

tions have been closed. We expect gold prices to be at USD

1,600 per ounce at the end of 2020.

Georgette Boele

Senior Strategist, Currencies and Precious Metals

22 November 2019 Spot End 2019 Avg 2020 End 2020

Oil

Brent USD/bbl 63.71 60 65 70

WTI USD/bbl 58.25 55 60 65

Metals

Gold USD/oz 1467 1400 1500 1600

Silver USD/oz 17.18 15.5 16.6 18

Platinum USD/oz 913 900 1000 1100

Aluminium USD/t 1741 1742 1814 1835

Copper USD/t 5826 6112 6317 6650


Forecasts: Commodities

Updates to ABN AMRO forecasts can be found at https://insights.abnamro.nl/en/

19



20

After a run of successful years, there are clouds on the horizon for private equity. Many inves-tors believe a correction is likely. Private equity investors are advised to stay invested, and to choose skilled managers with experience during downturns.

The private equity industry has experienced unprec-

edented success in recent years. More money has been

raised, invested and distributed back to investors than in

any other period in the industry’s history, according to Bain

& Company. Private capital in general, and private equity

in particular, enjoy increased investor interest, both from

institutional and private investors. However, there are also

cautionary notes sounding. Experts are increasingly debat-

ing how long the good times can last.

Correction may be coming

A growing proportion of investors interviewed by Preqin

believe that we are at the peak of the equity market cycle

and that the likelihood of a correction is quite high. This

view comes amid persistent high prices and competition for

assets and an abundance of uninvested capital (so-called

‘dry powder’). There is also uncertainty regarding the effec-

tiveness of further quantitative easing by central banks,

geopolitical risks and trade disputes. The critical question

Private Equity: Tips for uncertain times

is what are the implications for investors in such a market

environment?

We believe that investors should follow rigorously time-

tested principles of portfolio diversification. For long-term

investors in private equity, this means investing to ensure

a high degree of vintage year diversification. (The vintage

year is the year that capital is deployed in an investment.)

It is virtually impossible to perfectly time the market. And

as committed capital is drawn over several years, when the

private equity cycle can be in very different stages, limited

partners who stop investing when uncertainty increases can

lack exposure to vintage years with above-average perfor-

mance. This is because market corrections inevitably create

opportunities.

Historically, such corrections have brought down the valu-

ations of target companies – but not for long. According

to S&P Capital, in the past two downturns, the average

purchase-price multiple dropped by about 20% from its

high. But it subsequently recovered most of that within two

years. This means that it typically pays for investors to be

invested when a correction arrives, especially when backing

managers who learned valuable lessons during prior crises

and that are therefore prepared for a market correction.

Choose experienced managers

Managers who show a healthy capital deployment pace

across a fund’s investment period and who are ready to invest

when a downturn arrives should be preferred. They will also

focus their investment diligence more intently on declining

scenarios to ‘pressure test’ investments. And these firms

will include operational experts in due diligence. This serves

to build greater conviction about investment assets and can

avoid blind spots which could have severely negative conse-

quences on a company’s performance in a downturn.

Andreas Hegedüsch, Senior Investment Professional Private Equity

Florian Simmerer, Junior Investment Professional Private Equity

21


With a no-deal Brexit believed to be off the table, the euro and British pound have found support. The stability now seen in currency markets, however, may not continue, given the risk of a potential sell-off of the US dollar.

At the start of October, the euro versus the US dollar (EUR/

USD) dropped below the level of 1.09 because of a dollar

liquidity shortage, weaker eurozone data and Brexit uncer-

tainty. Since then, the euro has recovered. This is because

the outlook for Brexit has improved markedly, the Fed has

taken measures to ease the US dollar liquidity shortage and

eurozone data have not been worse than expected.

We think that a disruptive Brexit is now unlikely, because the

Conservative Party will campaign ahead of the elections on 12

December on their Brexit deal, the Labour party will campaign

for a new referendum and the Liberals will campaign to revoke

Article 50. These dynamics have given, and will continue to

give, a strong boost to sterling, but also support to the euro. At

the same time, the improved Brexit dynamics (and also pros-

pects for a US-China trade truce) have weighed on the Swiss

franc, the Japanese yen and the US dollar.

Market calm looks unsustainable

For quite some time currency markets have been relatively

calm, especially EUR/USD. We do not think this stability in

markets is sustainable. For a start, volatility in the options

market is exceptionally low. This is not by itself a reason to

expect higher volatility, but it should give pause for thought.

In addition, the US dollar is at high levels and it is relatively

expensive, with the flip side being that sterling, the euro, the

Australian dollar and the New Zealand dollar are relatively

cheap. Moreover, the technical picture could be changing.

The US dollar index is close to its 200-day moving average.

The 200-day moving average is a good guide for the longer-

term direction in currency markets. If the US dollar index has

a sustainable break below the 200-day moving average, it

could be the start of a bigger US dollar downturn.

Better Brexit outlook supports the euro

The British pound versus the US dollar (GBP/USD) is

currently above its 200-day moving average. The 200-day

moving averages in EUR/USD and the Australian dollar

versus the US dollar (AUD/USD) are also relatively close.

Last but not least, speculators are holding net-long US dollar

and net-short euro, sterling, Australian and New Zealand

dollar positions. The net-short positions in the latter two

currencies are quite substantial. A partial closing of these

positions would trigger strength in these currencies versus

the dollar. Taken together, investors are probably hesitant to

build long US dollar positions from current levels. The risk is

increasing of a US dollar sell-off in the coming weeks and

months.

Georgette Boele

Senior Strategist, Currencies and Precious Metals


Currency forecasts

FX pair

Spot

22 November

2019

Year-end

2019

end June

2020

Year-end

2020

EUR/USD 1.1075 1.12 1.15 1.16

USD/JPY 108.64 108 110 112

EUR/JPY 120.31 121 127 130

GBP/USD 1.2920 1.30 1.34 1.35

EUR/GBP 0.8571 0.86 0.86 0.86

USD/CHF 0.9939 0.97 0.97 0.97

EUR/CHF 1.1006 1.09 1.11 1.12

USD/CNY 7.04 7.10 7.15 7.20

USD/BRL 4.20 4.00 4.15 4.25Updates to ABN AMRO forecasts can be found at https://insights.abnamro.nl/en/

22


ABN AMRO Global Investment CommitteeRichard de Groot [email protected] Global Head Investment Centre

Han de Jong [email protected] Chief Economist

Reinhard Pfingsten [email protected] Global Head Asset Allocation Services

Olivier Raingeard [email protected] Global Head EquityMary Pieterse-Bloem [email protected] Global Head Fixed Income

Group EconomicsGeorgette Boele [email protected] Senior Strategist, Currencies and Precious Metals

Hans van Cleef [email protected] Senior Energy Economist

Global Investment CentreOlivier Raingeard [email protected] Global Head Equity

Arthur Boelman [email protected] Equity Research & Advisory Expert

Paul van Doorn [email protected] Senior Portfolio Manager, Equities

Esther van Munster [email protected] Senior Portfolio Manager, Equities

Joost Olde Riekerink [email protected] Equity Research & Advisory Expert

Sandra Saidi [email protected] Senior Portfolio Manager, Equities

Piet Schimmel [email protected] Senior Equity Thematic Expert

Guido Stiel [email protected] Senior Portfolio Manager, Equities

Jeffrey Vonk [email protected] Opportunity Analyst Customized Advice

Jan Wirken [email protected] Senior Equity Research Expert

Mary Pieterse-Bloem [email protected] Global Head Fixed Income

Roel Barnhoorn [email protected] Senior Fixed Income Thematic Expert

Florian Bardy [email protected] Fixed Income Portfolio Manager

Willem Bouwman [email protected] Senior Fixed Income Portfolio Manager

Matias Grinberg [email protected] Fixed Income Expert

Tim Hesse [email protected] Fixed Income Expert

Chris Huys [email protected] Senior Fixed Income Portfolio Manager

Fidel Kasikci [email protected] Senior Fixed Income Portfolio Manager

Thomas Smid [email protected] Senior Fixed Income Expert

Reinhard Pfingsten [email protected] Global Head Asset Allocation ServicesPaul Groenewoud [email protected] Quant Risk Specialist

Martien Schrama [email protected] Profile Manager

Chris Verzijl [email protected] Quant Strategist

Romeo Chamman [email protected] Quant Risk SpecialistArkadi Odintsov [email protected] Quant Risk Specialist

Thomas Domeratzki [email protected] Senior Strategist

Steffen Kunkel [email protected] Senior Strategist

Private EquityAndreas Hegedüsch [email protected] Senior Investment Professional Private Equity

Florian Simmerer [email protected] Junior Investment Professional Private Equity

Contributors

23


Disclaimers

General: The 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 products 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 responsibility 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 typographi-

cal 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.

Liability: Neither ABN AMRO nor any of its agents or subcon-

tractors shall be liable for any damages (including lost profits)

arising in any way from the information provided in this docu-

ment or for the use thereof.

Copyrights & distribution: ABN AMRO, or the relevant

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all the information provided in this document (including all texts,

graphic material and logos). The information in this document

may not be copied or in published, distributed or reproduced in

any form without the prior written consent of ABN AMRO or the

appropriate consent of the owner. The information in this docu-

ment may be printed for your personal use.

US PersonUS Securities Law Disclaimer: ABN 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 addi-

tion, 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, includ-

ing (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 jurisdictions: Without 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 them-

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of this document and the offering, sale and/or distribution of the

investment products and investment services described herein.

ABN AMRO cannot be held responsible for any damages or losses

that occur from transactions and/or services in defiance with the

restrictions aforementioned.

10:00 AM CET

27 November 2019

ABN AMRO MEESPIERSON

AMSTERDAM

Jan Willem Hofland

[email protected]

BANQUE NEUFLIZE OBC S.A.

PARIS

Olivier Raingeard

[email protected]

BETHMANN BANK AG

FRANKFURT

Thomas Henk

[email protected]

ABN AMRO PRIVATE BANKING

ANTWERPEN - BERCHEM

Erik Joly

[email protected]

This publication is produced by the Global Investment Communications team. If you have questions or comments, contact the team at [email protected].

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