KBC Investment Strategy Presentation Dynamic July 2020
Investment strategy Dynamic Investment climate Key rate trends and outlook ▪ The European and US economies are restarting relatively quickly. 3,0 3,0 ▪ High-frequency indicators suggest that the economy is getting underway again. 2,0 2,0 ▪ All the same, the direction and strength of the recovery are not very clear as yet. ▪ A full recovery is likely to take several quarters if not years. 1,0 USA 1,0 ▪ What’s more, the risk of new flareups in the Covid-19 epidemic remains. EMU 0,0 0,0 European economy haemorrhaging, but governments offer prospect of improve- ment -1,0 -1,0 06-2015 06-2016 06-2017 06-2018 06-2019 06-2020 ▪ Revised growth figures for the first quarter of 2020 in the euro area show that the lockdown measures imposed from March onwards inflicted unprecedentedly severe Ten-year interest rate developments and prospects damage on the economy. 5,0 5,0 ▪ The contraction was, however, a little smaller than initially estimated. Ten-year interest rate USA ▪ We detect substantial differences between the euro countries. The reduction in GDP Ten-year interest rate Germany 3,0 was much greater in Spain, Italy and France than in the Netherlands and Germany. 3,0 ▪ The downturn in economic activity was probably even greater in the second quarter. 1,0 ▪ Hard economic figures as well as sentiment indicators point towards an extremely 1,0 weak economy. -1,0 ▪ The lockdown measures were only introduced in the middle of March and remained in place for the whole of April. They began to be relaxed in May, but were not lifted -1,0 -3,0 entirely. 06-2015 06-2016 06-2017 06-2018 06-2019 06-2020 ▪ The recovery of the European economy has been supported by drastic monetary and budget measures. ▪ At the beginning of June, the European Central Bank expanded and extended its emergency bond-purchasing programme. ▪ The European Commission too issued a proposal to revive and strengthen the economy (Next Generation EU). ▪ These policy measures resulted in a narrowing of rate spreads in the euro area and an appreciation of the euro against the US dollar. ▪ We have raised our estimate for economic growth in the euro area to -9.6% for 2020.
Investment strategy Dynamic Investment climate Slight optimism concerning a Brexit deal ▪ The UK does not want an extension to the transition period for its exit from the European Union and will therefore leave the EU completely on 31 December 2020. ▪ Little progress is currently being made in the negotiations on the future relationship between the UK and the EU. Both parties expect, however, to be able to achieve greater progress in the summer. ▪ The fact that barely any progress has been made to date, implies that the agreement will be more of a limited than a wide-ranging one. This suggests a framework accord on trade in goods, with very little on services. ▪ A limited agreement like this would lead to a ‘controlled but messy’ exit by the UK from the EU at the end of this year. This is also likely to somewhat increase trade problems between the UK and its most important trading partners in the EU. Fast restart in the US, despite risks ▪ The prospects for the US economy remain heavily overshadowed by the uncertainty regarding the future course of the corona pandemic. ▪ States are restarting their economies earlier than anticipated, which will give a boost to the economy in the third quarter compared to the extremely gloomy second quarter. ▪ At the same time, the significant rise in the number of confirmed Covid-19 cases in a large number of states emphasises the risk associated with this restart. ▪ We have nevertheless raised our growth forecast for 2020 to -6.5%, as the high- frequency indicators are improving and budgetary and monetary policy is stimulating the recovery.
Investment strategy Dynamic Investment climate Higher oil price, higher inflation Trend in EUR/USD exchange rate and fair valuation ▪ Supply and demand have realigned in the oil markets faster than expected, resulting in 1,6 1,6 a vigorous recovery in the price of oil from its April low. ▪ The restart of the economies in Europe, the US and China ensured greater demand 1,4 1,4 for oil, while OPEC+ is curbing output. ▪ Higher oil prices translate to higher forecast inflation in 2021 in the euro area and the 1,2 1,2 US. 1,0 1,0 Mixed signals from China and the emerging markets 0,8 0,8 ▪ It is fair to describe the economic recovery in China as V-shaped. 06-2005 06-2008 06-2011 06-2014 06-2017 06-2020 ▪ Industrial production and car sales and registrations are now higher than they were a year ago and the sentiment indicators are pointing towards economic expansion. Inflation ▪ The figures for retail sales and electricity consumption, however, suggest that the 5,0 5,0 recovery in the service sector is lagging behind. Inflation EMU Inflation USA 4,0 4,0 ▪ The risk of a new wave of infections also applies to China. ▪ We maintain our growth estimate for the Chinese economy of just 1.0% in 2020. 3,0 3,0 ▪ Developments in a number of other emerging markets provide fewer grounds for 2,0 2,0 optimism. This applies in particular to Latin America, which has become the new 1,0 1,0 epicentre of the pandemic. 0,0 0,0 -1,0 -1,0 06-2015 06-2016 06-2017 06-2018 06-2019 06-2020 06-2021
Investment strategy Dynamic Portfolio allocation Overall portfolio Equity and bond returns for the past year 120 120 ▪ In our investment strategy, we are keeping shareholdings below their benchmark level Bonds for the time being. 110 110 Equities ▪ A combination of the following elements will be necessary before the equity card can be played once again: 100 100 ▪ slowing down and flattening in the rate at which the number of infected people is 90 90 increasing, which will indicate that the spread of the coronavirus worldwide is being brought under control; 80 80 ▪ bottoming out of leading economic indicators; 70 70 ▪ adjusted and realistic earnings forecasts. The analyst community still seems to 06-2019 09-2019 12-2019 03-2020 06-2020 be expecting unrealistically high corporate earnings. Downward adjustments are in euros, index 100 = -6 months inevitable. ▪ Given the extremely low interest rates (even negative in some cases), we remain invested below the benchmark level for bonds. Dynamic Allocation Change Benchmark ▪ We are parking the remaining assets in cash positions in euros. Equity exposure 52.50% 2.50% 55.00% Bonds 42.50% 0.00% 45.00% Alternative investments 4.00% 0.00% 0.00% Cash 1.00% -2.50% 0.00%
Investment strategy Dynamic Bonds portfolio Bonds deployed chiefly as a buffer Yield spread between government and corporate bonds in the euro area ▪ The bond component primarily serves as a solid buffer relative to our equity positions. 300 300 ▪ Despite low interest rates, we are focusing our government bond portfolio on short- AAA AA A BBB 250 250 dated paper issued by euro-area countries to counterbalance fluctuations on the stock markets. 200 200 ▪ Our corporate bond holdings are above their standard level. They offer an attractive 150 150 additional return compared to government paper, while the ECB’s bond-purchasing 100 100 programme is supporting prices. 50 50 . 0 0 06-2015 06-2016 06-2017 06-2018 06-2019 06-2020 Allocation of Bond Portfolio Allocation Benchmark By Currency Euro 97.58% 100.00% USD 0.39% 0.00% Other 2.03% 0.00% By Bond Type Euro Sovereigns 54.86% 70.00% Euro Corporates 37.81% 30.00% Emerging Markets 0.12% 0.00% Others 7.21% 0.00%
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