Didier Duret - RTL.nl

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Work in progress
We may well be entering an investment phase that builds
for the future and focuses less on “muddling through”.
Traditional sources of safe yield are exhausted,
forcing investors to look for yields on instruments
that discount future economic value.
Faster public-policy reforms, political and social changes and
game-changing technologies can remedy the eurozone and
US debt crises – despite the apparent paralysis caused by
slow global growth and political “getting by”. The economic
slowdown, painful and politically risky as it is, is not a slump
but a healing process for more sustainable growth that is less
dependent on debt, greed and trade imbalances.
Policymakers have become masters of controlled fiscal
austerity; below the surface, resilient and dynamic private
firms store future value. Thus 2012 may yet be seen as a
turning point, economically for the US and politically for the
European Union.
Key trends
• Slow economic growth. With no clear timing for recovery,
the worst risks seem covered by leading developed
countries’ pragmatic and extraordinary reflationary
monetary policies and emerging countries’ fiscal initiatives.
These moves will ultimately lead to more sustainable
growth, removing market sentiment from the thrall of the
negative scenario (see graph).
• Much lower systemic risks of a eurozone break-up.
Deflation is now policymakers’ primary concern in the US,
eurozone and some major developing countries. The “fiscal
cliff” in the US, the chances of a slump in Europe and the
Scenario over time
Economic expansion
2 %
1 %
2012
-1 %
-2 %
Anaemic long-term growth
Euro
break-up
Economic contraction
Source: ABN AMRO Private Banking
Controlled austerity – Slow recovery
Euro
break -up
Euro
break- up
Euro
break- up
Euro
break- up
Research & Strategy
Didier Duret – Chief Investment Officer
possibility of a hard landing in China are known risks,
allowing for positive surprises.
• Wide sector divergences in the economic “bottoming out”.
The crisis has reshuffled private firms’ competitive order,
with a new mix of winning technologies and countries for
them to operate in. And consumer behaviour and the
sources of demand are changing rapidly, calling for
investor positioning that deviates from stock market
benchmarks.
Key challenges
• Building on market confidence. Policymakers must leverage
the sentiment gained through their bold commitments.
The financial markets will be the best judges, rewarding
effort and penalising reform sluggishness.
• Differentiating between expensive and risky assets.
Investors must ascertain which can legitimately remain
expensive – such as cash-rich, sustainable-dividend
companies – and those whose high price reflects risk,
such as US Treasuries and German Bunds.
• Riding short-term market risks created by the heavy
agenda of change. Even companies with solid fundamental
value are not immune to disruptive changes and volatility.
Sustainable growth
2020
Rosy scenario
Central scenario
Negative scenario
Key opportunities
• Equities, now overweight.
The reduction in systemic risk
highlights the value left by the crisis,
and the resilience of earnings during
slow economic growth.
• Biotechnologies. An economic
revolution in the making –
independently and within the macro
landscape – with multiple facets
beyond Healthcare (overweight).
• High-quality property. A highyielding,
low leveraged asset, backed
by cash flow. Malls and rents are
supported by turnaround signs in the
US housing sector.
• Specialised hedge funds. The case
stands for managers such as
discretionary global macro and
event-driven.
• Convertible bonds, once the primary
market revives. US high-yield and
emerging-market bonds are
expensive but remain a source of
yield in a slow growth context.