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Impact Investing

IPE special report May 2018

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Moderate equity returns expected

Our investment recommendations reflect our expectations for the global economic growth. In short, we expect:
o world economy growth will accelerate in 2000 and 2001;
o the US economy will experience slowly declining growth (a soft landing);
o European growth is finally on its way up;
o the inflation will increase at the beginning of the year, and then stabilise;
o the central banks will tighten the monetary policies further;
o during the year the Euro will begin to appreciate against the US-dollar;
o return on equities will be higher than the yield on bonds, in 2000;
o the relatively high valuation of the equity markets will dampen returns in 2000 compared to 1999.
We expect that the central banks’ tightening of the monetary policies will exert pressure on the valuation of the equity markets. Interest rate increases are expected, although the inflation is expected to increase only moderately from its present level and mainly as a result of the increasing oil prices. The yield curve is expected to continue to flatten as the central banks raise the rates. Although we expect the long-term interest rate level to offer attractive returns, increasing growth and the risk of increasing inflation causes us to recommend an underweight of bonds compared to equities.
Our expectations for the return on equities in 2000 reflect the fact that the equity markets already last year priced in increasing growth in the European economy. In the short and medium terms, the requirements have increased for the companies to deliver results that come up to expectations. Therefore, our expectations for the return on equities in 2000 are moderate.
On a regional base we recommend being overweight in European equities, neutral for US equities and underweight for Japanese equities. The underweighting of Japanese equities is to be seen partly in view of the returns in 1999, partly as a result of the fundamental problems in the Japanese economy. We do not consider the Japanese economy to be in a self-sustaining economic upturn.
Gudme Raaschou recommends an investment strategy in which the selection of sectors and equities is focused on companies in growth sectors. We also pursue an investment strategy that aims at utilising some long-term trends (mega trends) in the international corporate structure. The essential themes and trends are concentrated on the demographical development towards an ageing population, especially in the OECD countries, a considerable increase in the use of technology and telecommunication and increasing focus on and concentration around companies’ business models, which leads to an ever increasing degree of outsourcing, particularly of services.
Furthermore, we prefer companies that are market leaders due to their ability to generate the highest operating margins, thereby having the best opportunity to allocate significant resources to research and development, which is becoming increasingly important due to the extremely intensified international competition. The market leaders also benefit from the typically lower valuation of potential acquisition candidates within the same sector. Focus on market leaders subsequently leads to a preference for growth stocks rather than value stocks.
After an extremely profitable year for IT equity investments, it is natural to consider whether the heavy increase in IT equity prices will be able to continue. We maintain a positive view on the IT sector, but do, however, expect investors to become more selective than in 1999.
We recommend three interesting business segments within the selective investment model: Web-based software and services, European Internet companies and wireless data communication (ie WAP). Our motivation for this is that we expect e-commerce to seriously penetrate the market in 2000, as a result of increased confidence among consumers as well as the business community. This will bring about demand for companies that skilfully develop and maintain complex, web-based management of customer relations, client databases, and inventory control systems. We recommend the following sector exposure:
Sector Benchmark/Recommendation: Technology and Telecom 28%/35% Cyclicals 20%/15% Trade and services 20%/22% Financials 19%/13% Health Care 8%/10% Non-durables 5%/5%.
Niels Antonsen, is chief portfolio manager at Gudme Raaschou Investment bank, Denmark; anton@gr.dk

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