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16 Property Capturing dividends Listed real estate is overweight in our asset allocation and offers opportunities, as risk–return expectations for listed property stand between those of bonds and equity. Real estate in our focus areas – mai<strong>nl</strong>y retail, renting and to a lesser extend residential – generates quite stable income, as tenants usually have long-term contracts and rents are linked to inflation, which is expected to come down o<strong>nl</strong>y slightly. On top of that, the deleveraging process that started after the onset of the global crisis continues, with loan-to-value ratios declining and balance sheet quality improving. We focus on top-tier companies that can generate dividend yields of 3-4% in the current slow-growth and low-interest rate environment, which could imply paying a premium for investments in the best locations, regions and categories. These companies maintain their competitive advantage in the current low sovereign yield environment as they can refinance at lower rates. We avoid the lower-quality real estate companies that offer double-digit yields as these dividends could be at risk. This is especially important for Europe, where vacancy rates are low in prime locations and limited new supply is coming to the market, while rents are falling in secondary locations on increasing vacancies and hardly any demand from occupiers. We recognise the opportunities globally offered by the sector. Regionally we prefer the United States (overweight) to Asia (neutral) and Europe (underweight). Economic headwinds and banking refinancing will make it hard for European property stocks (investments in real estate were down by 27% year-on-year in Q1 2012). In contrast, US real estate investment trusts (REITs) offer positive earnings momentum as regulators require them to increase their dividend payments by 10–15% in the coming year. The US market Research & Strategy Manuel Hernandez – Property Specialist showed a solid start in 2012, but volume growth is levelling off, indicating a mature phase in the recovery. This is mostly in the retail sector, with vacancy rates at 6.9% and rental levels stable. In Asia, the average debt ratio for property companies is around 20%, much lower than in Europe and the US. China and Hong Kong drive Asia ex-Australia and ex-Japan. With two rounds of rate cuts since June by China’s central bank, the chances of a soft landing for that housing market have increased. Real estate dividend yields (%) 12,5 % 10,0 % 7,5 % 5,0 % N. America Europe Asia 2,5 % Nov 2007 Nov 2008 Nov 2009 Nov 2010 Nov 2011 Source: Bloomberg Asset class Fundamental view Recommendations Overweight US REITs: These offer positive earnings momentum as regulators require them to increase dividends Overweight: North America Asia: The housing market in China and Hong Kong drives performance Europe: Economic headwinds and banks’ re financing weigh Neutral: Asia Underweight: Europe
Private equity A momentum of its own Five years into the financial crisis, private equity continues growing steadily, and has total managed assets of more than $3 trillion. When mark-to-market became the practice for valuing investments in 2009, it hit the market values of investment companies, but their valuations have since improved. This is partly because private equity has a long investment horizon, and expectations of short-term gains are out of tune with the process of adding value over the entire holding period. Political uncertainties and regulatory requirements may affect returns across regions, hence the need to build a well-balanced portfolio. Europe continues to face uncertainties and we favour private equity funds targeting resilient companies in downturns, regardless of location worldwide. Distressed Economic stresses continue to create opportunities. Much debt has also been refinanced over the past two years and maturities extended with risk of default in 2013–2017. Buyouts Smaller companies could be early beneficiaries in an economic upturn, while operational and strategic improvements have a larger impact in the mid-cap segment. Transaction volume is recovering from 2009 with average quarterly transactions of more than 25, but volumes less in aggregate. We are now in a similar phase to 2004 (a good year). Economic value to gross earnings multiples for 2012 are just under 8x (they were 7.2x in 2004) – entry valuations should ideally stay at 7.5x. Many high-quality buyout managers are expected to raise new funds in the next two or three years after a relatively slow fund-raising environment. Quarterly Outlook Q4 September 2012 17 Research & Strategy Olivier Palasi – Head Private Equity Mezzanine Mezzanine is a debt instrument that can offer equity-like gross returns with debt-like risks. High cash coupons generate near-term cash income and equity co-investment allows mezzanine investors to experience an upside. There are many opportunities for mezzanine, as these private placements are competing with traditional public financing in the large and mid-cap space. This strategy is suitable for riskaverse clients looking for a first entry into private equity. Secondary market Public market corrections and the slowdown in exit activity have kept downward pressure on prices. Sellers may be reluctant to sell portfolio companies but public market volatility could spark additional sales from banks and investors with a weak hand. Venture We favour growth equity relative to early stage capital. Longterm technology and healthcare trends bring opportunities – reforms in US healthcare will boost investments in related services.
Page 1 and 2: Work in progress Quarterly Outlook
Page 3 and 4: Contents Quarterly Outlook Q4 Septe
Page 5 and 6: Finding a cyclical bottom; headwind
Page 7 and 8: Splitting the work to fix the euro
Page 9 and 10: Equity market - Sector outlook Digg
Page 11 and 12: New equity theme - Biological solut
Page 13 and 14: Bond portfolio allocation Real yiel
Page 15 and 16: Forecasts Knowing what is possible
Page 17: Commodity outlook Balancing forces
Page 21 and 22: - continued *Recommended duration;
Page 23 and 24: Disclaimers © Copyright 2012 ABN A

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