KBC Investment Strategy Presentation Dynamic June 2020 Investment - - PowerPoint PPT Presentation

KBC Investment Strategy Presentation

Dynamic

June 2020

Dynamic

Investment strategy

Investment climate

Key rate trends and outlook

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0,0 1,0 2,0 3,0 06-2015 06-2016 06-2017 06-2018 06-2019 06-2020 USA EMU Ten-year interest rate developments and prospects

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Substantial economic contraction, uncertain outlook ▪ Initial estimates suggest that the euro area, the US and China underwent a sharp economic contraction in the first quarter of 2020 as a result of the coronavirus crisis. ▪ As the lockdown was not introduced until the middle of March in most regions, this figure reflects only the economic downturn at the end of the quarter; despite this, the figure is worse than expected. It suggests that the coronavirus crisis has brought the economy to a halt very quickly. ▪ We think the economies will go through a particularly deep recession this year, followed by a strong recovery in 2021. The contraction of Western economies in the second quarter of 2020 is likely to be particularly severe. ▪ The outlook is of course highly uncertain. ▪ As several countries are beginning to ease the lockdown measures fairly rapidly, the risk of new waves of infection has increased. This has also increased the risk of new lockdowns and an even worse economic outcome. Disastrous first quarter in Europe ▪ The provisional growth figures for the first quarter in a number of euro area countries confirm that the coronavirus crisis is having an unprecedented negative impact on the economy. ▪ Some countries have been hit harder than others. ▪ The downturn in France, for example, has been greater than in Germany, possibly because the service sectors account for a larger share of the French economy. Business confidence indicators also suggested that the service sectors had been hit harder than industry. ▪ Given the earlier than expected easing of the lockdown in the euro area, we think the recession will be slightly less deep than originally thought. ▪ At the same time, however, reports concerning corporate investments, the labour market, private consumption and world trade suggest that the economic recovery following the recession will also be less powerful. ▪ It will therefore take longer for GDP in the euro area to reach pre-crisis levels.

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Investment climate

Unprecedented shock in the United States ▪ Several states in the United States (US) are reopening even before there are any clear signs of a reduction in the number of coronavirus infections or deaths. The risk of new lockdowns in the near future is accordingly increasing. ▪ Meanwhile, the US unemployment rate has already risen to 14%. This makes it likely that the recovery from recession in the US, too, will take place only gradually. Central banks dampen stock market volatility ▪ Calm has returned to the financial markets, in parallel with the radical policy measures taken by the US Central Bank (Fed) and the European Central Bank (ECB). ▪ Despite this, interest rate spreads between the euro area countries remain relatively high, reflecting the uncertainty about the extent of European solidarity.

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Investment climate

Trend in EUR/USD exchange rate and fair valuation 0,8 1,0 1,2 1,4 1,6 0,8 1,0 1,2 1,4 1,6 05-2005 05-2008 05-2011 05-2014 05-2017 05-2020 Inflation

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Mixed signals on Chinese recovery ▪ China appears to have passed the worst of the crisis. ▪ The number of new Covid-19 infections is fairly limited and the majority of the Chinese economy is up and running again. Real growth is expected to recover in the second quarter. ▪ However, the indicators paint a mixed picture of the strength of the recovery. ▪ One positive note is that investments in industrial production are showing a clear recovery. ▪ The confidence indicators (Markit Purchasing Managers Index) give some cause for concern, however. ▪ This could suggest that the negative consequences of coronavirus on the world economy are also impacting on the economic recovery in China. ▪ Recent signs that the American-Chinese trade war could reignite are also a factor here. ▪ In addition, Chinese retail sales are recovering more slowly than had been hoped. Unprecedented oversupply on the oil market ▪ Coronavirus has also hit the oil markets hard. ▪ The oil price has plummeted to its lowest level in many years, though there has been some stabilisation in recent weeks. ▪ However, the unprecedented glut means the market is still a long way from being in calmer waters. ▪ The new decision by OPEC+ (Organisation of the Petroleum Exporting Countries) to cut production by 10% could partially limit the record imbalance between supply and demand, but a genuine restoration of that balance will require a significant increase in demand.

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Investment strategy

Portfolio allocation

Equity and bond returns for the past year

75 85 95 105 115 70 80 90 100 110 120 05-2019 08-2019 11-2019 02-2020 05-2020 Bonds Equities

in euros, index 100 = -6 months

Dynamic Allocation Change Benchmark Equity exposure 50.00% 0.00% 55.00% Bonds 42.50% 0.00% 45.00% Alternative investments 4.00% 0.00% 0.00% Cash 3.50% 0.00% 0.00%

Overall portfolio ▪ In our investment strategy, we are keeping shareholdings below their benchmark level for the time being. ▪ A combination of the following elements will be necessary before the equity card can be played once again: ▪ slowing down and flattening in the rate at which the number of infected people is increasing, which will indicate that the spread of the coronavirus worldwide is being brought under control; ▪ bottoming out of leading economic indicators; ▪ adjusted and realistic earnings forecasts. The analyst community still seems to be expecting unrealistically high corporate earnings. Downward adjustments are inevitable. ▪ Given the extremely low interest rates (even negative in some cases), we remain invested below the benchmark level for bonds. ▪ We are parking the remaining assets in cash positions in euros.

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Bonds portfolio

Yield spread between government and corporate bonds in the euro area

50 100 150 200 250 300 50 100 150 200 250 300 05-2015 05-2016 05-2017 05-2018 05-2019 05-2020 AAA AA A BBB

Allocation of Bond Portfolio Allocation Benchmark By Currency Euro 97.62% 100.00% USD 0.42% 0.00% Other 1.96% 0.00% By Bond Type Euro Sovereigns 60.08% 70.00% Euro Corporates 31.59% 30.00% Emerging Markets 0.11% 0.00% Others 8.22% 0.00%

Bonds deployed chiefly as a buffer ▪ The bond component primarily serves as a solid buffer relative to our equity positions. ▪ Despite low interest rates, we are focusing our government bond portfolio on short- dated paper issued by euro-area countries to counterbalance fluctuations on the stock markets. ▪ Our corporate bond holdings are at benchmark level.

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Equity portfolio

European equities versus US equities

70 100 130 160 190 220 70 100 130 160 190 220 05-2015 05-2016 05-2017 05-2018 05-2019 05-2020 American equities Eurozone equities

in euros, index 100 = -5 years

Allocation of Equity Portfolio Allocation Benchmark By Region Eurozone 7.90% 9.20% Rest of Europe 6.80% 9.10% North America 61.70% 59.10% Pacific 9.70% 11.00% Emerging Markets 13.90% 11.60% By Sector Defensives 26.70% 25.50% Cyclicals 58.20% 54.50% Energy 1.90% 3.80% Financials 13.20% 16.20%

Short term accents Emerging markets ▪ We think emerging markets are set to stage a comeback. The growth outlook is consistently higher than in the Western countries and growth should pick up again in the second half of 2020. China certainly seems to be recovering faster from the coronavirus crisis than the rest of the world. Shares from these markets lagged behind sharply in recent years. Forecast earnings growth ought to be better than in the other markets, resulting in an attractive valuation compared with the rest of the world. European small and mid caps ▪ Smaller companies, many of which expand into the larger business segment, generate stronger growth than their bigger counterparts in the medium term. ▪ The fact that their focus is more on the local (European) market makes smaller companies less vulnerable to trade tensions or border closures. These businesses are struggling in response to the coronavirus crisis, but thanks to government intervention, they ought to be able to pick up quickly as soon as growth begins to recover. Long term themes Invest in water: ▪ Drinking water is in scarce supply, due in part to problems with obsolete and inadequate water infrastructure, climate change and problems with water quality and waste-water. This ensures robust long term revenue growth for water companies. These companies are generally valued a little more expensively and so are trading at a premium, but this is fairly usual given their higher-than-average turnover and earnings growth. Global Trends ▪ This theme focuses on companies that respond to structural trends in the economy and society. It specifically relates to digitalisation (including business software for digital transformation, e-commerce, cloud infrastructure, artificial intelligence and cyber security), medical technology (research into promising medicines, etc.), demographic trends (ageing population, urbanisation, etc.), innovation and changing consumer

• behaviour. Many of these trends have gained momentum due to the Covid-19 crisis.

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Equity portfolio

For instance, the digital revolution for businesses and individuals has accelerated due to vigorous growth in e-commerce, innovative communication apps and new forms of health care. Medical Technology ▪ Medical equipment is the most important sub sector of this market segment. It comprises a highly varied range of products that enjoy robust sales growth, due in part to continuous innovation and geographical expansion. The sector is heavily focused

• n the United States, which is an advantage under current market conditions. The

nomination of Democratic candidate Joe Biden (as opposed to Bernie Sanders, who is committed to a thorough reorganisation of US healthcare) also represents somewhat greater certainty for the medical insurers segment.

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Opportunities

Within the bond component /

Short-term themes

Within the equity component European Small and Mid Caps ▪ Stronger growers in the medium term. ▪ Higher profit margins. ▪ Less sensitive to trade tensions. Emerging markets ▪ Structurally higher growth prospects, accelerating economy from the second half of 2020 onwards. ▪ Shares have continued to lag behind the broad market, but the tide is turning. ▪ Earnings growth may recover faster in emerging markets than for example in Europe or the US, making the current valuation attractive.

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Opportunities

Within the bond component /

Medium-term themes

Within the equity component Global Trends ▪ Focus on growth-oriented sectors. ▪ Less exposed to the vagaries of the economy. ▪ Boost given by the coronavirus crisis. Water ▪ The scarcity of water will drive long-term growth. ▪ Companies addressing the scarcity issue will grow with the economy. ▪ Good valuation. Medical Technology ▪ Defensive and growth oriented. ▪ Sustainable sales growth through innovation and geographical expansion. ▪ Strong US orientation.

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