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Impact Investing

IPE special report May 2018

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Netherlands: Strong dollar boosts industry

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The Dutch economy is in robust condition but given its size depends at least partly on movements elsewhere in equities and, more particularly, bonds.

Oscar Poos, Dutch strategist at Bank Paribas, describes prospects as quite good, considering the amount of growth witnessed already. Profitability of companies on average is at about 12% profit growth. From this high level profit growth prospects are reasonable," he says. He suggests, however, that growth figures may be more exciting in other European markets, with many countries returning from "really low figures".

The second reason for optimism is the strong dollar. "The Dutch market is one of the most highly correlated with the dollar. The dollar is high and many Dutch companies have a lot of sales in the US so the translation effect alone is quite positive."

The final reason is high liquidity due to uncertainty over state pension schemes. "Insurance companies are seeing demand for private schemes, and all this money has to be invested. Quite a lot will go into shares."

Kees de Vaan, equity strategist at MeesPierson, says that at the start of the year the firm was quite cautious about what was driving the market. It had been expected interest rates of 6.1% at year-end butthey were now at 5.5%, with earnings a little bit better than expected.

Following the recent "tremendous performance" which has led to a revision of targets to 680 or 700, he is now cautious about the second half of the year, a slightly different emphasis to Poos.

" Our bond yield target is at 6.1 so in the second half we have a dollar decline and a bond yield rise. This should bring the market down to original valuation levels."

In terms of stock selection, Poos sees problems. "The weighting of quite a lot of shares is getting slightly demanding, meaning high growth in company terms don't necessarily mean high growth in share terms."

He does recommend insurers and financials, companies such as Aegon and ING, and the construction sector, due to benefit from increased infrastructure spending in the next five years. "Maybe some of the selected cyclicals may benefit from the dollar."

De Vaan is largely in agreement, being overweight in financials, publishing and construction. He does not see any major risks for the next year although he believes that valuation is getting a bit demanding. He adds that people have already factored in slightly higher bond yields and believes that when there is a sell-off, it will be very limited.

Martin Van Oorschat, bond specialist at MeesPierson, says any consideration of the market must involve Germany "the mighty neighbour" and the US. "Our one-year view is that we expect a yield for 10-year bonds of about 6.5." He expects the 100-basis-point disparity between Germany and the US to shrink and is unsure of the need to tighten monetary restrictions at the moment.

He believes that uncertainty over EMU will strengthen the dollar and that this will produce upward pressure on German bond yields particularly as the dollar is fuelling import price inflation. "We expect upward pressure on German bond yields, so for the Dutch we see exactly the same," he adds.

For the moment, however, Dutch yields - thanks to the difficult situation in Germany - are too low and do not truly reflect the Dutch economy. John Lappin"

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