Financial Markets Research
Léon Cornelissen, Lukas Daalder and Ronald Doeswijk
1. Summary and conclusions 3
1.1 economic outlook 3
1.2 Financial markets 3
2. Introduction 5
3. Economic outlook 6
3.1 Global economy 6
3.2 north america 7
3.3 europe 8
3.4 Pacific 10
3.5 emerging markets 12
4. Financial markets 14
4.1 the asset mix 14
4.1.1 equities 14
4.1.2 Real estate 16
4.1.3 corporate bonds 17
emerging debt 18
4.1.4 Government bonds 18
4.1.5 commodities 20
4.2 Favorite investment themes within equities 22
4.2.1 emerging markets 22
4.2.2 conservative equities can continue to shine,
natural resources rebound candidate 22
5. Important information 25
Special: Obama’s re-election 9
Special: the european Debt crisis: several orderly defaults in 2012 11
Special: a chinese debt problem? 13
editing: Mark Fisher
Special: Gold, bubble or double? 21 Design: studio Robeco
2 | Outlook 2012
1. summary and conclusions
1.1 Economic outlook there will probably be several orderly defaults, a strengthening of the
the euro crisis has been one of the main themes of the last 18 months. european banking sector by the fiscal authorities, a substantial increase
sad to say, but unless policymakers understand the urgency needed and in the permanent safety net, and several longer-term proposals to change
the size of the rescue package required, it is likely to be one of the leading european treaties to strengthen political union.
themes for 2012 (and beyond) as well. the lack of leadership, as well as
the absence of consensus on how to address the problems, will continue there are a couple of reasons not to get too excited about Japan. the
to reduce the credibility of any short-term, halfway solution that is slowdown of the world economy and the strength of the yen raise serious
concocted. the eFsF is too small; the co-ordination necessary to stop concerns about the external sector’s role as growth engine in 2012.
a banking crisis from spreading is not there. a more optimistic observation is that the domestic economy may be the
main driver, especially as reconstruction spending in the earthquake-hit
another worrying development is policymakers’ reduced ability to react regions continues. although this will certainly support domestic spending,
to possible new problems. back in 2008, both monetary and budgetary the offsetting risk is a tax rise in order to keep the government from being
policymakers responded adequately, by flooding banks with liquidity and sucked into the ever-worsening debt vortex.
by boosting demand, at the cost of huge government deficits. three years
on, and with the debt picture deteriorating sharply, the scope for further Growth in emerging markets should continue to be relatively strong,
budget stimulus is limited. Meanwhile, central banks have learned that while inflationary pressures there are expected to abate. emerging
quantitative easing (Qe) measures – at least the ones implemented so far markets typically have favorable demographics, relatively low
– have not been so effective in turning the economy around. government-debt ratios and comparatively strong growth rates. in 2010,
some countries were wrestling with economic overheating and rising
On a more positive note, the corporate sector – excluding the financial inflation, as well as fretting over destabilizing capital inflows. now,
sector – is still in a pretty good shape: balance sheets are solid and though, these economies are set to slow as well, while inflation will be
liquidity is not much of an issue for larger companies. a lot depends on less of a threat, as should the destabilizing capital inflows. capital is on
animal spirits, though: hiring and investment largely depend on future its way home. Despite the relatively good economic performance, all is
expectations. and at present, there does not appear to be an obvious not well, however. indian inflation remains stubbornly high. and Vladimir
catalyst to set the train in motion. Putin’s return as Russia’s president has increased the concerns about
the quality of corporate governance in the country, as well as dampening
the consensus estimate for global growth in 2012 is currently 2.9% expectations of meaningful economic reform there.
(dollar weighted, instead of purchasing power parity rates), while
inflation is expected to come in at 2.4%. We believe the economic growth 1.2 Financial markets
estimates for developed economies are a bit too optimistic in the face of From a macro-economic point of view, one could say that we are in
the current slowdown of the global economy. in particular, the eurozone a mid-cycle dip in the economy’s recovery phase. however, the debt crisis
growth estimate of 1.0% leaves quite some room for disappointment. in the eurozone is a big worry. as the situation deteriorates, a point could
be reached where policymakers take drastic steps to turn around the debt
On balance, we are not too pessimistic about the Us. in other words, crisis. but continuing elevated uncertainty will hinder the economy and
we do not expect a new recession. that said, there is no reason to be stock prices. We are skeptical about the projected earnings growth of
very optimistic, either. as long as new shocks (such as a messy default 13% in both 2011 and 2012. On balance, we believe stocks are currently
in europe, the implosion of china, a political stand-off resulting in a somewhat undervalued. Overall, we believe that hard times for equities
temporary Us government shutdown or a spike in commodity prices) can will continue for a while, as the eurozone debt crisis remains a dominant
be avoided, the Us economy should be on a 2% growth path for 2012. factor. equities are strongly dependant on political choices. these are hard
to predict, but as long as uncertainty remains as high as it currently is,
the euro area as a whole is sliding into recession. We believe that sentiment will remain lackluster anyhow. We may reach a turning point
Germany – the region’s best-performing economy this year – will narrowly in the final months of 2011 or in 2012 when there is more visibility on
escape two quarters of negative growth, while France and italy will not. the way out from the debt crisis. From there on, the outlook for equities
these developments are not helping to ease the eurozone debt crisis. should brighten.
Outlook 2012 | 3
in the rebound from the bottom in early 2009, real estate outperformed at this stage, we refrain from a negative view on the asset class. but as
equities, though also after a huge correction since the asset class’s peak soon as the prospects for risky assets brighten, high-quality government
in 2007. as the debt crisis in the eurozone has intensified this year, it bonds are set to enter a period of unattractive returns.
has been a bit of a surprise to see property stocks extending their 2010
outperformance. the balance sheets of real estate companies have at the start of this century, the accelerating growth of the global middle
improved. the ratio of net debt to total assets is decreasing, but it is class turned around a multi-decade decline of real commodity prices.
still high from a historical perspective. access to funding will remain an We believe that commodity prices will continue their long-term uptrend,
important issue for the foreseeable future. From a valuation perspective, even though they have recently been affected by the economic slowdown.
we believe there is no significant difference between equities and real We expect the commodity market to continue to be characterized by
estate. the outlook for real estate closely resembles the one for equities. capacity constraints on the supply side. On the demand side, demand
from emerging markets is still decent. even if growth in demand for
after the sell-off in investment grade and high yield bonds, prices now commodities from emerging markets were to fall back to the level of
seem to be factoring in a recession. spreads in the Us market are currently GDP growth, global demand would still rise, with stable demand from
high in a historical context. One could argue that spreads have risen too developing economies. so as long as developed markets remain in the
far, given that corporate balance sheets are healthy and loaded with recovery phase of the economic cycle, the outlook for commodities is
cash. as the market has been expecting a Greek default for a long time, favorable: demand will rise, while the supply side is tight. the risk for
the impact when it eventually occurs should not be as severe as after the commodities is that the debt crisis in the eurozone drags the region into
surprise failure of lehman. Given the attractive valuation, we are inclined a severe recession, negatively impacting the fragile economies of the
to take a positive view on investment grade and high yield bonds relative Us, the Uk and Japan. in such a scenario, supply would not appear to
to their government counterparts for 2012. in the short term, however, we be that tight in 2012, and a further decline in commodity prices should
maintain our neutral view. We need more clarity on policymakers’ choices. be expected, albeit in a long-term uptrend. the outlook for agricultural
commodities strongly resembles the one for energy and industrial metals.
the average yield on local-currency emerging debt (at over 6.5%)
looks attractive. investors have recently withdrawn money from emerging markets equities have taken a beating of late. as in 2008,
emerging markets, both from equities and bonds. this pattern suggests a risk-off market climate appears to affect the relative performance of
an indiscriminate risk-off trade, disregarding the relatively healthy emerging markets significantly. Despite the sell-off, the longer-term
fundamentals in emerging markets. aside from its role as a diversifier, relative uptrend that started in 2002 is still holding up well. We believe
emerging debt offers attractive investment prospects. in the short term, that this trend is likely to continue, for fundamental reasons. in addition,
the asset class will be affected by the volatility and uncertainty in financial emerging markets should find some support from relative valuation levels.
markets. longer term, however, the asset class should have attractive
returns, based on the higher interest rates. Foreign currency exposure Without any exceptions, defensive sectors have outperformed the market
does add some volatility, but we believe that there is a longer-term during 2011. the rally in cyclicals that started when the market bottomed
prospect for emerging currencies to appreciate. in March 2009 ended in the first quarter of 2011. at that time, the flow of
very strong macroeconomic data came to an end, while worries about the
long-term bond yields have set new lows for the period since 1900. debt crisis in the eurozone started to intensify. When it becomes less murky,
these low rates are the result of central bankers’ loose monetary “risk free” assets and defensive stocks are set to lose their attractiveness.
policies. bond investors seem to be rather pessimistic on the potential For investors worried about missing the turn from defensives to cyclicals,
for growth. Moreover, the past suggests that, in the medium term, there low-volatility stocks (or so-called conservative equities), with exposure
is a heightened risk of inflation. after all, it has helped the deleveraging to all sectors, are a good option. low-volatility stocks lag the market
process after financial crises. We therefore think that high-quality only during strong rallies in equity markets. Otherwise, they bring high
government bonds are unattractive over the medium- to long term. risk-adjusted returns. as we are forecasting some more years of sluggish
For an investment horizon of a year, we have to take into account the economic growth, and as we believe stocks to be only slightly undervalued,
low inflationary risks and the uncertainty surrounding the eurozone debt we do not expect a lengthy, robust rise by equity markets. in such a climate,
crisis. Furthermore, short-term interest rates will remain low during 2012. low-volatility equities can continue to shine.
4 | Outlook 2012
The dynamics of the eurozone debt crisis have caught the market by surprise. Uncertainty is
high at present and this is affecting the real economy. Risky assets have delivered negative
returns because of fears that the mid-cycle dip in the recovery phase will end in a double dip
due to the debt crisis. High-quality government bonds and gold have served as safe havens.
in this annual publication, we look forward to 2012. First, we discuss the economic outlook. this is
followed by a look at the financial markets.
Outlook 2011 | 5
3. economic outlook
3.1 Global economy associated with the failure of lehman in 2008. at the same time, this is
in 2011, global growth was hit by temporary and more structural factors. not a lehman moment, in the sense that it will be difficult to maintain
the earthquake and tsunami in Japan disrupted global supply chains. that financial markets were caught by surprise: we have been muddling
Political unrest in the Middle east and north africa pushed up oil prices. through for more than 18 months already. if the muddling through ends
Financial markets were unsettled by the anything-but-temporary political and action is taken, a crisis can be diverted – for now.
stalemate in the Us. this deadlock prevented the implementation
of measures designed to achieve sustainable government finances another worrying development is policymakers’ reduced ability to react
in the medium term, which in turn provoked s&P’s unprecedented to possible new problems. back in 2008, both monetary and budgetary
downgrade of its aaa credit rating for the Us. the improvement of the policymakers responded adequately, by flooding banks with liquidity and
Us labor market is disappointingly slow. in europe, the sovereign-debt by boosting demand at the cost of huge government deficits. three years
crisis intensified. the rise in the risk premium for italy was particularly on, and with the debt picture deteriorating sharply, the scope for further
disconcerting. the european economy is in – or close to – a mild budget stimulus is limited. Meanwhile, central banks have learned that
recession, which could easily worsen, as a lack of decisive policy measures quantitative easing (Qe) measures – at least the ones implemented so far
will become an independent factor further hampering growth. Japan is – have not been so effective in turning the economy around. Given that at
recovering nicely, but there are a couple of reasons not to get too excited. least part of the effectiveness of a new Qe program is linked to its ability
emerging markets in general experienced rising inflation. to boost sentiment, this instrument seems to have been blunted. the
positive exceptions to this rule are the emerging economies, which have
the euro crisis has been one of the main themes of the last 18 months. low deficits and no debt problems.
sad to say, but unless policymakers understand the urgency needed
and the size of the rescue package required, it is likely to be one of the On a more positive note, the corporate sector – excluding the financial
leading themes for 2012 (and beyond) as well. the lack of leadership, as sector – is still in a pretty good shape: balance sheets are solid and
well as the absence of consensus on how to address the problems, will liquidity is not much of an issue for larger companies. a lot depends on
continue to reduce the credibility of any short-term, halfway solution animal spirits, though: hiring and investment largely depend on future
that is concocted. the eFsF is too small; the co-ordination necessary to expectations. and at present, there does not appear to be an obvious
stop a banking crisis from spreading is lacking. some fear that the euro catalyst to set the train in motion. the same applies to consumers.
crisis is going to be the “lehman moment” for europe. the potential cost although they appear to have improved their balance sheets over recent
of a disorderly default, or a collapse of the euro, easily dwarfs the cost years, the uncertainties over jobs (in the Us and europe), taxes (Japan and
Economic growth Inflation
2010 2011 2012 2010 2011 2012
source: consensus economics source: consensus economics
6 | Outlook 2012
europe) and even the euro (the eurozone) are not very helpful. state, it wouldn’t take too much for growth rates to fall dangerously
close to zero: higher oil prices and supply chain disruptions related to
in the background, themes such as aging (Japan and Germany) the Japanese tsunami pushed the Us economy perilously close to recession
and scarcity (commodities) are still present, but do not seem to play earlier this year. so where does this leave the economy in 2012?
a particularly important role at this stage.
all things considered, the Us economy should be able to steer clear of
all in all, the outlook for 2012 is rather weak. the Us economy is stagnant; a recession. the yield curve is almost as flat and low as it was at the
the housing market there is moribund. a fall back into recession is unlikely, height of the crisis – the yield on the 30-year treasury is currently well
based on the low interest rate environment and the declining price of below the level of inflation. the most important difference from the 2008
commodities. On the other hand, the Federal Reserve is running short low is that the financial sector is not being crippled by the fall-out from
of ammunition and political support. in europe, a mild recession seems lehman’s failure. according to the latest senior loan Officers survey, banks
inevitable. Domestic demand is weak, partly driven by austerity, partly by have relaxed their credit standards, which means that the economy is
uncertainty; export growth is leveling off due to the slowdown of the world actually benefiting from the low rates. in addition, the corporate sector
economy. Policy errors in connection with the eurozone debt crisis could is – on balance – healthy: profit margins are high, while liquidity is
easily make the economic environment worse, with potentially worldwide plentiful. consumers – always the key element of the Us economy – have
consequences. Japan is set for weak growth. Growth in emerging markets systematically deleveraged over the past three years, reducing the debt
should continue to be relatively strong, while inflationary pressures there service burden to historical averages. true, labor markets have not acted
are expected to abate. as an accelerator, but consumer demand has nevertheless held up pretty
well. With oil prices down by 30% from the peak reached at the end of
the consensus estimate for global growth in 2012 is currently 2.9% april and with the negative spill-over from the Japanese supply chain
(dollar weighted, instead of purchasing power parity rates), while inflation disruptions mostly in the past, it is feasible that the economy is on the
is expected to come in at 2.4%. We believe the economic growth estimates verge a rebound.
for developed economies are a bit too optimistic in the face of the current
slowdown of the global economy. in particular, the eurozone growth that said, there are numerous structural problems that could easily stop
estimate of 1.0% leaves quite some room for disappointment. such a scenario from materializing. For one, although consumers have
lowered their debt burden, it has been done in part by defaulting. this
3.2 North America means that a substantial number of Us consumers have been cut off from
From the trough reached in mid-2009, the Us economy has managed to
eek out an annualized growth rate of just 2.4% – assuming there are no
further downward revisions, that is. although such a performance is in line Financial obligations US consumers declined, or shifted towards banks?
with the steady state growth rate based on population and productivity
growth, it is well below a normal post-recession ramp-up. but recent 32% 18.0%
research by the Dallas Federal Reserve comes to a different conclusion, 17.5%
as did earlier work by Reinhart & Rogoff. this research suggests that
the 2007/08 recession should not be compared with normal recessions; 28%
instead, it should be compared with recessions that were precipitated by 26% 15.5%
a banking crisis. On that basis, the recovery is more or less in line with 15.0%
the historical average. 24% 14.5%
this theory may have an impeccable academic grounding, but it is
hardly reassuring news. Of the 8.7 million jobs that were lost during
the downturn, only 1.9 million have been regained. Unemployment is
Renters (L) Homeowners (R)
stubbornly high (9%), while the government deficit has been around 10%
of GDP for three years running. With the economy in such a weakened source: financial obligations as a percentage of disposable income, flow of funds data,
Outlook 2012 | 7
credit and are now completely dependent on unemployment benefits be very optimistic, either. as long as new shocks (such as a messy default
and food tickets: 46 million americans are now officially living in poverty. in europe, the implosion of china, a political stand-off resulting in
this is increasing the risk that social tensions within society as a whole will a temporary Us government shutdown or a spike in commodity prices)
be exacerbated. in addition, by defaulting, the burden has shifted to the can be avoided, the Us economy should be on a 2% growth path for 2012.
banks. While banks are in better shape than three years ago, the recent Given the weak fundamentals of the dollar, a more positive risk-on climate
travails of bank of america show that the equilibrium remains precarious. is likely to result in a weakening of the Us currency against other major
For their part, the banks have also acted to reduce their exposure: currencies. a possible exception is the euro, especially in the short term.
foreclosed houses have been rapidly sold in the market, at substantial even so, our baseline scenario is for a stronger euro in the end, and thus a
discounts. the shadow inventory of unsold houses has dropped (to 1.6 weaker dollar.
million units), according to the most recent data from corelogic, which
is in addition to the 3.6 million officially for sale. this is still 12 months of 3.3 Europe
supply, indicating that house prices are likely to remain subdued for some Momentum in the Uk economy is slowing. as a consequence, the bank
time to come. With almost 25% of mortgage owners in negative equity, of england implemented further quantitative easing. We expect the Uk
the housing market continues to be a drag on the wider economy. at the government’s brutal fiscal tightening to be a drag on growth. With europe
same time, the economy is being left to its own devices. three years ago, faltering, we cannot be too optimistic about the Uk economy’s prospects.
both the Fed and the government had the will and the means to act, but Restructurings within the euro area will have above-average negative
both have bailed out along the way. the political scene looks set to be implications for the Uk financial sector.
paralyzed by the november 2012 elections (see box): it remains to be seen
how much of President Obama’s american Jobs act will survive its passage the euro area as a whole is sliding into recession. We believe that
through congress. Given this year’s constant bickering, government Germany – the region’s best-performing economy this year – will narrowly
spending could even be a net drag on the economy in 2012. the Fed, escape two quarters of negative growth, while France and italy will
meanwhile, has resorted to technical yield-curve “twisting” operations. not. these developments are not helping to ease the eurozone debt
although the jury is still out on this latest maneuver, it looks like these new crisis. a Greek default, which is likely to occur before the end of 2011,
measures will be as unsuccessful in reviving the economy as Qe2 was. will provide a deflationary shock, provoking consequences that are
not wholly foreseeable. it will not clear the air, however, as it will make
On balance, we are not too pessimistic about the Us. in other words, we defaults by Portugal and – probably – ireland in the course of 2012 more
do not expect a new recession. On the other hand, there is no reason to likely, as well as putting upward pressure on the risk premia of italy and
US recovery is almost non-present in labor markets Ten year interest rate spreads over Germany
99% 99% 20
97% 97% 15
90% 90% 0
60 64 68 72 76 80 84 88 92 96 00 04 08 J F M A M J J A S O N D J F M A M J J A S
Recessions Real GDP Greece Ireland Italy
Employment Portugal Spain Belgium
source: bloomberg, Robeco source: thomson Datastream, Robeco
8 | Outlook 2012
With 13 months to go and the choice of the (see chart). On both counts, the outlook for surely boost Obama’s chances. even though
Republican candidate yet to be made, there Obama is not particularly promising: the war in we do not expect a major improvement in
is very little certainty about how the 2012 afghanistan has resulted in over 800 fatalities the economy, a rebound in the second half of
presidential election will pan out. With that in so far in Obama’s presidency, while per-capita 2012 – albeit a temporary one – cannot be
mind, here we take a look at the likelihood of real disposable income growth of 0.14% is well ruled out. third, the models are based on past
President Obama’s re-election, and what the below the post-1948 average of 1.8%. as such, elections with two mainstream candidates. the
2012 elections will mean for the US economy. if elections were to be held now, the model Republicans are still in the early stages of the
predicts that Obama would suffer one of the nomination process, with tea Party candidates
It’s the economy, stupid! Or is it? worst defeats in post-war history. such as Michelle bachmann potentially in the
there are numerous models that predict the running to become the Republican candidate,
outcome of Us presidential elections. typically, there are a couple of things that should be though this is not very likely. the accuracy of the
these models try to estimate the incumbent’s borne in mind. First, how much will Obama be models when more extreme candidates run is
share of a two-party vote based on one or more blamed for the weak economic performance? questionable.
economic variables such as unemployment or When he was elected in 2008, the economy
GDP growth. looking at these models, however, was deteriorating badly, a situation that was Does it matter for the economy?
the general outcome appears to be that although seen as the legacy of his predecessor. While so what will be the impact of the elections on
the economy does matter, the margin of error Obama did not manage to turn the economy the Us economy in 2012? With the economy
is too large to yield a reliable forecast. simply around in the three years that followed, he currently flirting with recession, it looks like the
looking at the economy is apparently not enough. will certainly put some of the blame on the elections couldn’t have come at a worse time.
political stalemate that resulted from last year’s the elections limit the scope for government
the most famous model – and also the simplest midterm elections. in other words, playing to react in an adequate fashion to the business
– is one that does expand beyond economics: the blame game could help improve Obama’s cycle. in addition, they will paralyze much-
the so-called bread and Peace model designed chances, no matter what the model predicts. needed structural reforms for at least a year.
by the University of Gothenburg’s Douglas the fate of the ambitious american Jobs act,
hibbs. the model has an adjusted r-square of second, the accuracy of the election models which was announced by Obama at the start
0.86 from looking at just two variables: growth generally increases as the election approaches. of september, can be seen as a test case.
of per-capita real disposable personal income if the Us economy were to rebound from the although the full implementation of the UsD
and cumulative Us military fatalities in war second quarter of 2012 onwards, this would 447 billion plan would be a net stimulant for
the Us economy in 2012, more than half of the
program consists of expiring measures being
rolled over. if the Republicans were to block
parts of it – such as the proposed extension of
unemployment benefits – the plan could even
be a net drag on the economy.
Will the outcome of the elections make much
change to the existing stalemate? this will
depend not only on the Presidential election,
but also on what happens in the elections for
the senate (33 of the 100 seats) and the house
of Representatives (all 435 seats). Whatever the
upshot, it is to be hoped that it results in a clear
mandate for whoever will be in charge from
source http://www.douglas-hibbs.com election2012/2012election-MainPage.htm
Outlook 2012 | 9
Actual and core inflation eurozone Spillover effect is helping Japan to look good
1951 1961 1971 1981 1991 2001 2011 2007 2008 2009 2010 2011 2012
Nominal Economic Growth US Ten Year Bond Yield US Real GDP, quarter levels Real GDP, year averages
source: thomson Datastream, Robeco source: bloomberg, Robeco
spain. Mismanagement of the debt crisis by europe’s policymakers could rate: the consensus growth of 2.5% represents around 1.5% of underlying
easily push the eurozone into a deeper recession. it is clear that some growth. even this 1.5% sounds too optimistic, though. as a general rule,
governments need to implement an orderly restructuring of their debt. the Japanese economy is largely export driven. the slowdown of the
some banks – including the ecb – need be recapitalized. Furthermore, world economy and the strength of the yen raise serious concerns about
some larger eurozone countries, though solvent, are vulnerable to the external sector’s role as growth engine in 2012. a more optimistic
speculative attacks and sufficient fire power to stave them off has to observation is that the domestic economy may be the main driver next
be put in place. this will preferably be done through a special purpose year, especially as reconstruction spending in the earthquake-hit regions
vehicle such as the eFsF, rather than by the ecb. these issues do not seem continues. although this will certainly support domestic spending, the
insurmountable, but the risks are on the downside. offsetting risk is that the newly appointed prime minister, Yoshihiko
noda, is contemplating raising taxes to prevent the government from
eurozone inflation has – quite unexpectedly – risen to 3.0% on a yearly being sucked into the ever-worsening debt vortex. Given the low level
basis, well above the targeted below-but-close-to-2.0% level. Underlying of consumption taxes (5%, compared with the 20% level of Vat in
inflation is behaving much better. headline inflation will probably fall in europe, for example) and the high level of gross debt (233% of GDP in
the months ahead thanks to declining commodity prices and the gradually 2011, according to iMF data), we would welcome a tax increase from a
weakening economy, allowing the ecb to lower short-term interest rates debt management perspective. but it is not going to be positive for the
back to 1.0%. they are likely to remain there for the whole of 2012. effective economy. the last time such an increase was implemented (in 1997, when
overnight lending rates can easily be much lower – that is, close to 0%. the tax was raised from 3% to 5%), the Japanese economy took a turn for
the worse, entering a recession before the year was finished.
looking at the expected growth rates of the various industrialized to be clear, raising the consumption tax is by no means our main scenario.
countries, one could be tempted to conclude that Japan is heading for a at present, there does not appear to be majority support for such a bold
strong year, bucking the trend elsewhere. consensus is expecting 2.5% move, while noda seems to have gone quiet on the subject since he
growth for Japan, beating both the Us (2.2%) and the eurozone (1.0%) became prime minister. the main scenario is one of budgetary muddling
by a fair amount. is this the long-awaited break from the 20-year low/ through, giving plenty of room for the debt mountain to keep on rising. so
no growth track record? sorry, no. there are a couple of reasons not far, Japanese bond markets are trading at extremely supportive levels, as
to get too excited. For starters, due to the 11 March earthquake, all of seen from the government’s perspective. however, as Greece has shown,
2011’s growth took place in the second half of the year. this will result sentiment can deteriorate rapidly. if that did happen, low growth would
in a substantial spill over, which will positively distort the 2012 growth be the least of the problems for Japan’s policymakers…
10 | Outlook 2012
the european Debt crisis:
several orderly defaults in 2012
the eU’s strategy for dealing with the debt fence italy and spain. Despite the deteriorating increased risk of a general unraveling of the
crisis is in tatters. its plan was to postpone the external environment, the italian and spanish whole area. Our assessment is that european
inevitable until the world economy recovered governments must make no slip-ups in their leaders will try to avoid disorderly defaults at
markedly and banks would, as a consequence efforts to reduce their deficits and debts, which all costs.
and thanks to overly generous monetary policy, must remain a top priority in their medium-
be in much better shape. but the eurozone term economic policy. european policymakers the eurozone is entering dangerous waters.
economy is on the brink of recession – or would be well advised to create a permanent there will probably be several orderly defaults,
perhaps it is already in one – and a default by safety net of sufficient size (say three times the a strengthening of the european banking sector
Greece is near. at the time of writing, it seemed current eFsF) to deflect any potentially self- by the fiscal authorities, a substantial increase
highly likely that Greece has bought another fulfilling speculative attacks on either of the in the permanent safety net, and several
three months and secured the release of an larger economies. the alternative is to let the longer-term proposals to change european
additional eUR 8 billion. Yet by December ecb become sovereign bond buyer of last resort, treaties to strengthen political union and to
2011, the Greek economy will be in an even a role it is unwilling to take on because of the make eurobonds possible in the long run.
worse condition. as a consequence, it is hard perceived conflicts with its main assignment: though possible, we consider a massive buyout
to see how the targets for budget-deficit price stability within the euro area. the crisis of peripheral debt (of around eUR 2,000
improvements will be achieved. Receiving can be seen as a power struggle between the billion) by the ecb unlikely at this stage. that
another tranche of support will be even more ecb (which is resisting sovereign defaults and is because of the lack of political support in
difficult than it was in October. We believe that only reluctantly buying sovereign debt) and the north european euro countries in general
a default – at the end of 2011 or a couple of europe’s governments (which are resisting the and Germany in particular, as well as the lack
months into 2012 – is likely. We hope it will recapitalization of the banks and an increase in of conviction on the part of the ecb’s major
be an orderly default, in common accord with the size of the safety net). the ecb has already players. but 2012 will most likely not be the
Greece’s european partners, which will probably lost some important battles, but it remains to endgame of the european debt crisis. to be
have to continue to support Greece because be seen who will prevail in the end. continued.
of its primary deficit (a primary surplus is
expected in 2012, according to iMF projections, the alternative to an orderly default by Greece
but these are in our view too optimistic) and is a disorderly default. in such circumstances,
to keep the country’s financial system from it would be tempting for a Greek government
collapsing. european banks should in general to leave the eurozone as well. a new drachma
be able to withstand a Greek default, but some would improve Greek competitiveness and
recapitalization measures to help maintain help to lower its current-account deficit.
confidence are probably inevitable. the ecb has bank accounts would be frozen, permitting a
to be recapitalized as well. an orderly default mandatory exchange of euro assets into the
would make it possible for Greece to remain in new currency. the Greek financial sector would
the eurozone. Restoring the Greek economy to have to be nationalized. short-term economic
competitiveness will remain an issue, even after consequences would be severely negative,
a default. but in the end the Greek population would
be given the prospect of a return to longer-
calm would not be restored by a Greek default. term economic health. the country would not
it will increasingly be felt that it is only a matter have to soldier on for years in a deflationary
of time before Portugal and – probably – environment. Of course, a country leaving the
ireland also need to default. the challenge euro would set an important – and dangerous
for europe’s policymakers will be to generate – precedent for the whole euro area. “Who’s
sufficient confidence in the region’s banking next?” would be a natural reaction, not least
sector to withstand these defaults and to ring- by financial markets, which would factor in
Outlook 2012 | 11
3.5 Emerging markets
at first sight, it is difficult not to like emerging markets as an asset class:
they typically have favorable demographics, relatively low government-
debt ratios and comparatively strong growth rates. in 2010, some
countries were wrestling with economic overheating and rising inflation,
as well as fretting over destabilizing capital inflows. now, though, these
economies are set to slow as well, while inflation will be less of a threat,
as should the destabilizing capital inflows. capital is on its way home.
Despite the relatively good economic performance, all is not well,
that said, we remain relatively optimistic about china. inflation seems
to have peaked at 6.5% in september and we expect it to decline
gradually. We feel that the worries about the chinese banking sector and
local governments are overdone, as long as a so-called “hard landing”
can be avoided, which we think is likely. the chinese authorities are
taking restrictive measures to bring the situation under control, while
the very high level of nominal GDP growth is making the debt burden
unproblematic. china can still easily grow itself out of its problems.
in contrast to china, indian inflation remains stubbornly high. the
benchmark wholesale price index is hovering close to 10%, despite
the Reserve bank of india having raised interest rates 12 times since
the start of 2010. Further hikes are necessary. Growth is set to decline as
a consequence of this and because of the slowdown in the global
economy. higher government deficits, a further deterioration of the
current account and a conspicuous lack of economic reform measures
Chinese and Indian inflation
2007 2008 2009 2010 2011
WPI India (% YOY) CPI China (% YOY)
source: thomson Datastream, Robeco
12 | Outlook 2012
a chinese debt problem?
it is generally assumed that the slowdown of in the event of overshooting, the authorities the low-growth mature markets. With china
the chinese economy that has been engineered have enormous room for maneuver in reigning in local governments and, though
by the country’s authorities isn’t something stimulating the economy, thanks to its low level slowing, still set to grow by about 9.0% in 2012,
to worry about. it is hard to assess the current of gross general government debt. indeed, a chinese debt crisis looks highly unlikely.
state of the chinese economy. that’s also the in 2010, gross general government debt
case for china’s policymakers, though thanks amounted to 34% of GDP. Recently, there have
to Wikileaks, we now know the preferred been suggestions that the “true” level of debt is
indicators of li keqiang, a prominent member much higher if you take a broader view. taking
of the politburo: electricity production, railway local governments into account, as well as bank
freight and domestic credit growth. these three restructuring costs and liabilities, the debt ratio
indicators are pointing to a soft landing for the rises to 80% of GDP. We are not talking Greece
chinese economy. or italy here, but this level suggests much less
room for maneuver in the event of an economic
downturn. What makes the figures for local
Economic indicators of Li Keqiang government particularly worrying is that they
were caused by the massive infrastructure
investments that were made to stimulate
the economy in the post-lehman economic
downturn. it is highly likely that the central
government will have to step in to take over
0 much of the debt to bail out local governments.
but we should not worry too much. an economy
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Electric Production (% YOY) Domestic Credit Growth (% YOY) with nominal growth of around 15% on a yearly
Railway Freight (% YOY)
basis can quickly grow its way out of its debt.
source: Datastream that makes the picture very different from
source: the economist
Outlook 2012 | 13
4. Financial Markets
After risky assets’ strong rebound from the March 2009 trough, market are even in – or close to – a mild recession. but getting the moderate
sentiment turned negative for equities, real estate and commodities. growth scenario back on track does seem to be within reach. Rising oil
In July, high yield and corporate bonds also started to weaken. At this prices are no longer hampering growth and retail sales in emerging
time last year, we expected sovereign risk to remain firmly on the markets are holding up rather well. and there is nothing special about
agenda, with a Greek debt restructuring in the distant future. However, a mid-cycle slowdown. as the recovery phase tends to deliver attractive
the debt crisis escalated earlier than expected. The risks of a speedy returns for equities, this should lead to a positive view on the asset class.
debt restructuring rose and contagion reached Spain and Italy in June. there is, however, one big worry. the debt crisis in the eurozone lingers on
Now, we believe that a Greek debt restructuring is close to occurring. and the continuing uncertainty is affecting economic growth. companies
Whether the policymakers will solve the debt crisis and whether are paying more for their funding and declining confidence is denting
the ECB will be sucked in to carry out massive buying remain open investment and consumption.
as the situation deteriorates, a point could be reached where
From March on, we started to take a more cautious view on risky assets policymakers take drastic steps to turn the debt crisis around. such
by eliminating our positive view on equities. Real estate, high yield and steps might include a mandatory capital injection by governments for
credits followed in the subsequent months. currently, we hold the view all eurozone banks; credible plans to increase labor-market flexibility
that things might still have to get worse before they get better. as long and downsize governments to boost productivity; or a clear signal that
as uncertainty remains as high as it currently is, sentiment will probably large eurozone countries will have ongoing access to funding, even if
continue to be lackluster. We may reach a turning point in the final this requires the ecb to print huge sums of money. taking such drastic
months of 2011 or in 2012 when there is more visibility on the way out steps to deal with the debt crisis is one scenario. there are alternative
from the debt crisis. after such a turning point, the outlook for risky assets scenarios, including dramatic ones that include a disorderly default. We
will brighten. consider a disorderly default less likely but not impossible, due to the
deep policy divisions in the eurozone against the backdrop of a weakening
4.1 Asset mix economy. Whichever scenario materializes, however, continuing elevated
uncertainty will hinder the economy and stock prices.
From a macroeconomic point of view, one could say that we are in earnings have impressed during the economic recovery. From mid-2009
a mid-cycle dip in the economy’s recovery phase. Developed economies to the second quarter of 2011, analysts’ upward earnings revisions have
Performance of asset classes (total return in euros; asterix marks unhedged return) Earnings margins S&P 500
01 02 03 04 05 06 07 08 09 10 11 51 56 61 66 71 76 81 86 91 96 01 06 11
Stocks Real Estate Commodities High Yield* source: empirical Research Partners – corporate reports. excludes financials,
Corp.* Government Bonds* Inﬂation L.* prior to 1976 the large cap universe is used
source: barclays, thomson Datastream, Robeco
14 | Outlook 2012
outnumbered their downward revisions. as the graph below shows, Us trend earnings, the Msci ac World index is undervalued by 12%. On
profit margins are rather high when viewed in a historical perspective. balance, we believe that stocks are currently somewhat undervalued. as
Using a trend line of the Msci World index’s real earnings as an indicator a final remark on valuation, we would like to point out that valuation is of
of earnings potential suggests there is limited upside. currently, earnings limited importance for short-term investment horizons and that over- or
are 17% above their trend. Our bottom-up analysts and portfolio undervaluation of up to 20% is fairly common. On longer-term horizons
managers generally share our view that earnings margins around the (of a few years and more), valuation is a very important driver of returns.
globe are high. We are therefore skeptical about the projected earnings that is shown by the history of the Us market between 1870 and 2011,
growth of 13% in both 2011 and 2012. On a more positive note, analysts as illustrated below.
are downgrading their earnings estimates massively: realism is on its way.
the big picture shows that equities are still in a kind of bear market that
started in 2000. since the start of 2000, the Msci ac World index has
gained in Us dollars, but has fallen in euros. the chart below shows
the real return on equities and the P/e ratio for the Us over the 1870-2011
period. like last year, we use this chart to underline our view that one
should not expect too much from equities, despite the disappointing
returns over the last 12 years. the chart shows that the current contraction
period has brought back valuation levels significantly.
the s&P 500 has gone through a major P/e contraction during the last Real stock prices and p/e ratio (US 1871-2011)
12 years, with the trailing P/e ratio now at 13.1x. that is more than 10%
below the average of 15.3x and also below the median of 14.2x. at first
glance, then, stock prices should be supported from here by attractive
valuations. but a closer look reveals a somewhat different picture.
the shiller P/e for the Us is still 22% above its long-term average. For 100.000
the Msci ac World index, the shiller P/e is in line with what we believe
to be a normal valuation level, as shown in the graph below. based on
Real trend earnings MSCI AC World Index 1.000
1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 2021
1981 1991 2001 2011
Real Earnings Index MSCI AC World (USD) Real Trend Earnings 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 2021
source: thomson Datastream, Robeco source: Robert shiller, Robeco
Outlook 2012 | 15
On balance, we believe that the hard times for equities will continue to-total assets ratio. access to funding will remain an important issue
for a while, as the debt crisis in the eurozone remains a dominant factor. for the foreseeable future.
equities are strongly dependent on political choices. these are hard to
predict, but as long as uncertainty remains at its current elevated level, in contrast to equities, real estate earnings revisions over the last three
sentiment will stay lackluster anyhow. We may reach a turning point in months have not turned massively downwards. While analysts are clearly
the last months of 2011 or in 2012 when there is more visibility on the way becoming less optimistic on the asset class, the turn is less dramatic than
out from the debt crisis. after such a turning point, the outlook for risky for equities. at present, based on Msci data, analysts are estimating
assets will brighten. that earnings will grow by 4% in 2011 and 7% in 2012. We believe that is
far more realistic than the 13% earnings growth that analysts expect for
4.1.2 Real estate stocks in 2011 and 2012.
in the rebound from the bottom in early 2009, real estate outperformed
equities, though also after a huge correction since the asset class’s peak From a valuation perspective, we believe there is no significant difference
in 2007. as the debt crisis in the eurozone has intensified this year, it between equities and real estate. the asset classes are highly correlated
has been a bit of a surprise to see property stocks extending their 2010 and, based on the price/cash flow ratio, their valuations hardly differ.
outperformance. the defensive characteristics of real estate have clearly he current price/cash flow ratio for real estate is 1.5x the one for stocks, as
been more important to investors than the sector’s dependency on illustrated in the chart on the next page. that is in line with the historical
funding. in addition, the global property universe has less exposure to average.
europe than global equities. Only in september did property lag equities.
We interpret this as a sign that funding worries are on the rise. On balance, the outlook for real estate closely resembles the one for
equities. in the event that moderate economic growth gets back on
the balance sheets of real estate companies have improved. the ratio of track, real estate will probably continue to benefit from its defensive
net debt to total assets is decreasing, but it is still high from a historical characteristics. but if the eurozone debt crisis deteriorates further, funding
perspective. however, one could argue that the value of assets has been problems are likely to dominate real estate. in such a scenario, real estate
brought into question by the high uncertainty over recent years, thereby will probably underperform equities. Meanwhile, if economic growth is
undermining the reliability of the net debt-to-total assets ratio. the net unexpectedly strong, real estate is likely to lag, as equities have more
debt-to-ebitDa ratio is also a useful indicator. this ratio also shows exposure to the global economy.
that leverage is decreasing but – again – it remains at elevated levels.
the historical performance of this ratio is roughly similar to the net debt-
MSCI World Shiller PE Performance Global Listed Real Estate Versus Global Stocks
5 ONE AND TWO STANDARD DEVIATIONS FROM AVERAGE
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 2005 2006 2007 2008 2009 2010 2011
source: Robert shiller, thomson Datastream, Robeco source: thomson Datastream, Robeco
16 | Outlook 2012
4.1.3 Corporate bonds the table below shows another way of looking at historical performance.
after the sell-off in investment grade and high yield bonds, prices now there, we separate the 1987-2011 history of Us yield spreads into ten
seem to be factoring in a recession. as the graph below illustrates, spreads deciles. at 2.4%, Us corporates are currently in the tenth decile, while high
in the Us market are high in a historical context. On the one hand, one yield’s 8.1% put it in the ninth decile. again, this points to cheap valuation.
could argue that spreads have risen too far, given that corporate balance as a result, we are inclined to take a positive view on investment grade
sheets are healthy and loaded with cash. On the other hand, the graph and high yield bonds relative to their government counterparts for 2012.
also shows what happens when the market gets really worried about in the short term, however, we maintain our neutral view. We need more
a credit crunch, as happened in 2008. but a situation like 2008 is rather clarity on policymakers’ choices.
extreme. as the market has been expecting a Greek default for a long
time, the impact when it eventually occurs should not be as severe as
after the surprise failure of lehman.
Real estate gearing (global net debt-to-total assets ratio) US spreads 1987 - 2011
Deciles US Corporates US HY
1 0.67% 3.0%
2 0.77% 3.3%
3 0.88% 3.7%
4 0.94% 4.5%
5 1.02% 5.0%
6 1.23% 5.5%
7 1.53% 6.3%
8 1.71% 7.2%
9 2.04% 8.4%
10 6.07% 18.3%
source: Ubs source: barclays, Robeco
Valuation of real estate versus stocks US spreads
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 01-1983 01-1988 01-1993 01-1998 01-2003 01-2008
Price-to-Cash-Flow Real Estate Relative to P/CF Stocks US IG Spread US HY Spread
Average P/CF Real Estate vs P/CF Stocks
source: thomson Datastream, Robeco source: barclays, Robeco
Outlook 2012 | 17
Emerging debt 4.1.4 Government bonds
Global growth is weakening against the backdrop of the deleveraging long-term government bond yields have set new lows for the period
process that needs to take place in developed markets. in that sense, since 1900. the ten-year interest rate in the Us has fallen as low as 1.7%
emerging economies are much better positioned, as indebtedness is and is currently trading at 2.0%. in Germany, the ten-year rate is now also
generally low and most countries are running surpluses on their budget at 2.0%. in the netherlands, the low was recently set at 2.2%, while
and/or trade balance. although exporting countries will feel the impact of the current rate is 2.4%. these low rates are the result of central bankers’
the weakening global economy, this sensitivity is much smaller than in loose monetary policies.
the past, thanks to the growing importance of domestic demand.
long-term history shows that ten-year rates are – on average – below
the average yield on local-currency emerging debt (at over 6.5%) looks the nominal economic growth rate. We believe this gap averages around
attractive. clearly, the risk of inflation is higher, but monetary tightening 0.75%. With ten-year rates at 2.0%, implied nominal growth rates are
and the slowdown of the global economy are both limiting it. investors thus below 3%, leaving little scope for real economic growth. to us, this
have recently withdrawn money from emerging markets, both from seems rather pessimistic on the potential for growth. Moreover, the past
equities and bonds. this pattern suggests an indiscriminate risk-off trade, suggests that, in the medium term, there is a heightened risk of inflation.
disregarding the relatively good fundamentals in emerging markets. after all, it has helped the deleveraging process after financial crises.
We therefore think that high-quality government bonds are unattractive
Market volatility is likely to remain high until some of the structural over the medium- to long term.
issues in the developed economies are resolved. nevertheless, we expect
appetite for emerging debt assets, as a diversifier in global fixed income For an investment horizon of a year, we have to take into account the
portfolios, to remain strong. low inflationary risks and the uncertainty surrounding the eurozone debt
crisis. Furthermore, short-term interest rates will remain low during 2012.
aside from its role as a diversifier, emerging debt offers attractive at this stage, we refrain from a negative view on the asset class. but as
investment prospects. in the short term, the asset class will be affected by soon as the prospects for risky assets brighten, high-quality government
the volatility and uncertainty in financial markets. longer term, however, bonds are set to enter a period of unattractive returns.
the asset class should have attractive returns, based on the higher interest
rates. Foreign currency exposure does add some volatility, but we believe
that there is a longer-term prospect for emerging currencies to appreciate.
Return and yield to maturity on emerging debt Ten year interest rates: 1900-2011
250 12 16
Dec-02 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
JPM GBI EM (total return in euro) JPM GBI EM Yield to Maturity (RHS)
source: bloomberg, JP Morgan, Robeco source: shiller, homer&sylla, thomson Datastream, Robeco
18 | Outlook 2012
US: long term interest rate and nominal economic growth
1951 1961 1971 1981 1991 2001 2011
Ten Year Bond Yield US Nominal Economic Growth US
source: shiller, consensus economics, thomson Datastream, Robeco
Headline inflation Core inflation
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
US Euroland China US Euroland China (only ex food)
UK Japan India UK Japan
source: thomson Datastream source: thomson Datastream
Outlook 2012 | 19
Return and yield to maturity on emerging debt Commodity prices (USD spot market)
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 2007 2008 2009 2010 2011
Energy Precious Metals Livestock Energy Precious Metals Livestock
Indstrial Metals Agriculture Indstrial Metals Agriculture
source: thomson Datastream, Robeco source: thomson Datastream, Robeco
at the start of this century, the accelerating growth of the global middle the risk for commodities is that the debt crisis in the eurozone drags
class turned around a multi-decade decline of real commodity prices. the region into a severe recession, negatively impacting the fragile
We believe that commodity prices will continue their long-term uptrend, economies of the Us, the Uk and Japan. in such a scenario, supply would
even though they have recently been affected by the economic slowdown. not appear to be that tight in 2012, and a further decline in commodity
prices should be expected, albeit in a long-term uptrend.
For energy and industrial metals, increased credit risk is limiting the
arrival of additional capacity on the supply side, as companies are facing the outlook for agricultural commodities strongly resembles the one for
higher funding costs. in addition, there is an increasing risk of policy- energy and industrial metals. Prices have been driven by the accelerating
related changes that also raise costs. Whether it derives from elevated global middle class. an additional factor is the shift to biofuels, which has
environmental awareness or from governments wanting a bigger piece created huge demand for agricultural commodities. For example, 40% of
of the pie is not that relevant. the reality is that companies are facing the Us corn harvest is used to produce ethanol. as in energy and industrial
higher costs to operate their businesses. as a result, they are becoming metals, supply is having trouble catching up. these long-term trends are
increasingly reluctant to invest. in short, we expect the commodity market likely to persist. (For an in-depth analysis of the outlook for agricultural
to continue to be characterized by capacity constraints on the supply side. commodities, we recommend the Rabobank report “Rethinking the
For example, production of copper is likely to grow by less than 1% for F&a supply chain: impact of agricultural Price Volatility on sourcing
a second consecutive year. that compares with demand growth of 4-5%. strategies”.)
On the demand side, demand from emerging markets is still decent. Finally, for the outlook for gold, we refer you to the special included in
even if growth in demand for commodities from emerging markets were this report.
to fall back to the level of GDP growth, global demand would still rise,
with stable demand from developing economies. so as long as developed
markets remain in the recovery phase of the economic cycle, the outlook
for commodities is favorable: demand will rise, while the supply side is
20 | Outlook 2012
Gold, bubble or real?
Although serious investors tend to look down at the parabolic rise of the gold price, this of missing out on interest has never been so
on gold as an asset class, there is no denying may feel like a one-way bet, but numerous low. borrowing in dollars and buying gold is
that its performance has easily beaten other sizeable – though temporary – corrections have cheap and is likely to remain so for some time
asset classes by a wide margin in recent taken place over the past decade. the most to come. second, with central banks flooding
years. Is it a bubble, or is it for real? pronounced was the 30% sell-off in 2008, when the markets with liquidity, the risk of currency
a flight to quality pushed all risky assets deep depreciation is on the rise. based on the
Static supply leads to high price into red territory. Despite that sell-off, gold still limited supply, gold is not threatened by this
volatility managed to close the year with a 6% positive depreciation battle, offering “real” value. third,
One of the key characteristics of the gold return, prompting many to claim that gold was central banks, after having been net sellers
market is its rigid supply structure. Roughly the next bubble. since then, gold has more for years, have become net buyers again, with
2,600 tonnes of new gold are mined each year, than doubled… asian central banks in particular underinvested
adding around 1.6% of the existing gold stock in gold.
each year. this new supply has risen somewhat Bubble or double?
in recent years, but based on the state of the so is it a bubble? as the old joke goes, the price at the same time, there are also a couple of
existing mines, the level of investments made of gold is understood by exactly two people negatives to put forward. First, as we saw in
by mining companies and the discovery of new in the entire world. they both work for the 2008 and again in september 2011, gold is not
fields (not impressive), it looks like not too bank of england and they disagree. Gold does a very reliable hedge against a possible crash
much upside is to be expected. Other supply not offer a dividend, a coupon or a claim on in financial markets. second, there is always
comes from recycling, either from jewelry or future cash flows (or the risks of a default, for the risk of regulation. Famously, Us president
old fabricated products. although higher gold that matter), making it difficult to determine Franklin D. Roosevelt signed an order back
prices should boost the re-use of gold, recycling whether the shiny metal is overpriced or not. in 1931 for the seizure of all the gold in the
peaked in 2009 at 1,700 tonnes, and did not the same applies to all commodities, but Us. there is no reason to expect such drastic
pick up following the price spike seen in 2010- other commodities have a direct use, linking measures this time around – gold is not part of
11. this suggests that there is limited room for the demand to economic activity. in the case the currency system, as it was back then – but
supply to match a rise (or a fall) in demand. of gold, only around 11% of demand is linked a high level of regulation does pose a potential
in such an environment, prices are known to to industrial usage, the rest comes from more threat. third – and most important – investing
experience explosive moves. elusive sources. about half of demand is linked in gold only makes sense if there are enough
to jewelry, with emerging markets such as india investors who believe we are not in a bubble
and the moves have been explosive. Over the and china the main drivers for the continued yet. Which brings us back to the original
past ten years, gold has managed to eek out growth. One would expect higher prices to question: is it bubble or double?
an annualized return of around 20%. looking have dented the demand for jewelry, but – so
far – this has been more than neutralized by the
Gold up strongly in nominal terms, rising wealth in these countries. the remaining
back to old peak in real terms demand comes from what the World Gold
5,000 council calls “investments”, which can either
4,000 take a physical form (coins, medals) or a non-
3,000 physical form, such as etFs.
1,000 it is difficult to quantify whether the demand
0 for gold as an investment will rise or has
-1,000 already peaked (creating a bubble). there
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
Recycling Mining are a number of reasons that argue in favor
Oﬃcial sector Total supply
* based on H2 ﬁgures
of gold as an investment. First, with interest
source bloomberg, OecD rates at depressed levels worldwide, the cost
Outlook 2012 | 21
4.2 Favorite investment themes within equities second, from a valuation point of view, there is some room for a
revaluation relative to the broader market. the price/book ratio still
4.2.1 Emerging markets points to a 3% overvaluation, but the price/cash flow, the price/earnings
emerging markets equities have taken a beating of late. as in 2008, and the price/expected earnings ratios all suggest an undervaluation
a risk-off market climate appears to be affecting the relative performance of of 10-14% relative to the market. emerging markets should therefore
emerging markets significantly. Despite the sell-off, the longer-term relative find some support from relative valuation levels. the expected earnings
uptrend that started in 2002 is still holding up well, as illustrated in the chart. growth in 2011 and 2012 is in line with the growth for the total market.
We believe that this trend is likely to continue, for several reasons.
Relative performance by region Valuation of emerging markets relative to market
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
North America Paciﬁc Price-to-Book Price-to-Earnings
Europe Emerging markets Price-to-Cash-Flow Price-to-Earnings 12M Forward
source: thomson Datasream, Robeco source: thomson Datastream, Robeco
First, from a fundamental point of view, we see four positives. to start 4.2.2 Low-volatility equities can continue to shine, natural
with, emerging markets do not have the government-debt and budget- resources rebound candidate
deficit challenges faced by many of their developed markets counterparts. Without any exceptions, defensive sectors have outperformed the market
Furthermore, their banking systems also seem to be less vulnerable. during 2011. the rally in cyclicals that started when the market bottomed
next, we expect some more years of high labor-productivity gains. in March 2009 ended in the first quarter of 2011. at that time, the flow of
Finally, domestic retail sales are still growing at a decent rate. From a very strong macroeconomic data came to an end, while worries about the
fundamental point of view, then, emerging markets remain attractive. debt crisis in the eurozone started to intensify. the worries about the debt
Earnings and valuation data of regions (MSCI AC World)
Earnings growth % Earnings Revisions Index P/E On 12M Fwd Earnings
2011 2012 12M 3M 1M Current 10Y AVG.
north america 16.8 13.3 13.7 5.0 -29.0 10.7 15.1
europe 6.3 11.1 10.1 -39.0 -60.0 8.8 13.2
Pacific 16.0 16.3 15.0 -22.0 -54.0 11.0 16.7
emerging Markets 11.3 12.8 12.8 -27.0 -37.0 8.7 10.7
ac world 12.7 13.0 12.7 -17.0 -44.0 9.9 14.3
source: thomson Datasream, Robeco
22 | Outlook 2012
crisis are still playing an important role in the markets. We believe that For investors worried about missing the turn from defensives to cyclicals,
the debt crisis still has to get worse before it gets better. talks about low-volatility stocks (or so-called conservative equities), with exposure
enlarging the eFsF and recapitalizing banks have started but even more to all sectors, are a good option. low-volatility stocks lag the market
pressure might be needed before policymakers take any convincing steps. only during strong rallies in equity markets. Otherwise, they bring
When it becomes less murky, “risk free” assets and defensive stocks are high risk-adjusted returns. as we are forecasting some more years of
set to lose their attractiveness. sluggish economic growth, and as we believe stocks to be only slightly
undervalued, we do not expect a lengthy, robust rise by equity markets.
in such a climate, low-volatility equities can continue to shine.
Relative performance of defensive sectors and financials Valuation of emerging markets relative to market
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Consumer Staples Telecom Financials Energy Industrials IT
Health Care Utilities Materials Consumer Cyclicals
source: thomson Datasream, Robeco source: thomson Datastream, Robeco
Earnings and valuation data of regions (MSCI AC World)
Earnings growth % Earnings Revisions Index P/E On 12M Fwd Earnings
2011 2012 12M 3M 1M Current 10Y AVG.
energy 23.4 7.9 10.1 -12.0 -52.0 8.0 12.0
Materials 33.7 15.4 16.9 -31.0 -59.0 8.3 13.0
industrials 14.8 12.4 12.7 -21.0 -58.0 10.2 15.2
consumer discretionary 17.2 17.9 16.7 -1.0 -21.0 11.5 16.5
consumer staples 7.6 10.3 10.0 -22.0 -32.0 13.7 16.0
health care 5.5 5.2 5.4 2.0 -23.0 10.8 15.8
Finanacials 8.1 17.6 16.5 -28.0 -64.0 8.2 11.8
it 9.4 13.3 11.4 -15.0 -35.0 11.3 19.6
telecom services 1.7 8.3 6.9 -12.0 -25.0 10.9 19.3
Utilities -3.4 21.0 14.9 -19.0 -36.0 13.3 13.3
ac world 12.7 13.0 12.7 -17.0 -44.0 9.9 14.3
source: thomson Financial Datastream
Outlook 2012 | 23
Within the cyclical sectors, the two winners of last decade, energy and
materials, have suffered badly in the correction. the materials sector
has been hit by the highest number of negative earnings revisions over
the last three months. the factor behind this long-term outperformance
is rising commodity prices; as the latter are likely to return due to tight
supply, natural resource stocks should benefit strongly after the equity
market bottoms, in line with our view on commodities. it is a similar story
for agricultural stocks, although these stocks have a mix of defensive and
cyclical characteristics. a rebound there would probably be less robust.
On the positive side, stocks in this area are less dependent on economic
growth in china than natural resources stocks.
24 | Outlook 2012
5. important information
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Outlook 2012 | 25
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