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Downbeat Dutch investors drawn to bonds

Dutch investors are most keen on developed market corporate and high-yield bonds; as well as Emerging Market government bonds (govvies) and corporates, according to the latest Future Flows survey from Expert Investor.

Cash weightings are up, indicating investors are a bit more cautious.

Like most of their European counterparts, developed govvies are right at the bottom of the rankings for Dutch investors and have the most sellers.

Among equities, the most positive Dutch fund selector sentiments are reserved for Asia ex Japan.

As for the rest of the asset classes included in the survey, buyers are down and sellers are up, so the picture is negative but certainly not apocalyptic.

The most bearish sentiment is reserved for US equities where the ratio of sellers to buyers is marked. As well as Asia ex Japan equities, Dutch investors also like private equity funds.

There is a slight preference for value over growth when it comes to European equities, but for US and Global Emerging Markets it is a fairly even split.

When it comes to market cap, there is a clear preference for large-cap over small for GEM equities – however this is not mirrored in US and European equities where no specific preference is expressed.

In equities at least, most respondents expect to keep their allocations largely unchanged over the next 12 months.

The respondents to the EI survey are all fund selectors, asset allocators and portfolio constructors working for mainstream financial institutions that use third-party funds.

Bonds

As already highlighted and in-line with pan-European average sentiments, Dutch respondents are hugely keen on developed market corporate and high-yield bonds.

EM debt funds are also in demand – more so than in most other European countries surveyed by EI. 

However, there is a much reduced appetite for developed market govvies and unconstrained bond funds are static.

Robeco portfolio manager Jeroen Blokland believes that, going forward, equities might be a better option than bonds – though he agrees with the survey that US equities, specifically, lack appeal right now – mainly due to inflated pricing.

“With spreads contracting by a full 250 basis points to 130 basis points, investment grade bonds are now much more exposed to duration risk, which is not something we necessarily like.”

Blokland says that this means the allure of equities relative to bonds has increased. “To be clear, on a standalone basis, equities do not look cheap, and in the case of the US they are outrightly expensive,” he says. “But within a multi-asset portfolio, it’s relative valuation that counts.”

He adds: “Also, recent economic developments suit equities well. While we continue to believe that a V-shaped recovery of the overall economy will be difficult to achieve, developments in some parts of the economy do fit that definition. Retail sales, for example, are already above the levels reached before the global virus outbreak in many countries, including the US.”

“In addition, we are getting closer to the announcement of a working vaccine, which can be produced and distributed globally. At the same time, we expect the global economy to keep improving, even though the low-hanging fruit has been picked. Activity levels are continuing to increase.”

According to Blokland, monetary conditions will stay extremely accommodative and central banks will act, if deemed necessary. He argues that equities have the ability to discount this news flow, much more so than bonds.

Decent recovery – for how long?

The portfolio managers of the Achmea Mix (Cautious) fund; which invests in a mix of  global and GEM equities, investment grade corporate bonds, Euro government bonds, and commodities, are also encouraged by market recovery but are mindful of how changeable the current climate is.

“Overall, the economy and stock markets are recovering much faster than expected. During the recession of 2008 – 2009, it took almost three years for retail sales in America to recover. Now, this was already the case after six months.

The managers add: “Retail sales are important because the US economy relies largely on consumer spending. The support measures of central banks and governments have clearly had a positive effect.”

Blokland agrees that this support of consumer has been vital but stresses it will need to continue.

He warns not to forget the risk of consumer confidence not fully recovering, pointing to the massive lay-offs and slow recovery of the labour markets, which have seen US consumer confidence drop to a six-year low.

Consumer confidence in Europe remains fragile too and without further stimulus, consumer spending in both US and Europe could be heavily impacted.

The view at Achmea is that the political climate is hardening in the run-up to the US presidential elections and as uncertainty surrounding Brexit continues to grow.

When further waves of Covid infection are factored, the conclusion is new aid packages will be needed to support the economy as the year progresses.

David Burrows

For more than 25 years, Dave has written for a wide range of newspapers and broadcasters including The Times, The Financial Times, The Independent, The Wall Street Journal, The Mail on Sunday, Reuters...

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