Robeco bearish on government bonds and property, mixed on Japan

Arnout van Rijn is chief investment officer of the Robeco Asia Investment Center and fund manager of Asia-Pacific equities. He started his career in the investment industry in 1990.

From 2003 to 2007, van Rijn was fund manager of Rolinco, Robeco's flagship global growth equity fund. From 2000 to 2002, he headed the fund desk at Rabo Investment Management in Hong Kong. Before that, he had been fund manager of emerging-market equities at Robeco since 1994.

Which asset classes, sectors or countries did Robeco see as its most successful in terms of investment in 2009?

Many of our equity funds recorded at least 40% return in 2009. Given our substantial experience in investing in emerging markets, the returns of our emerging-market funds were in the 90-100% range, and Robeco Chinese Equities recorded around 75% returns in 2009. The funds also clearly outperformed benchmark returns.

Our high-yield bond funds also recorded significant growth, with 60% returns last year.  

Robeco's energy and infrastructure funds performed the best in 2009, with each gaining over 40%. Our energy fund rose around 70%, substantially surpassing its benchmark index, the MSCI World TRN, which was up by 27.7%. Our two infrastructure funds both returned around 60% in 2009.

These outstanding performances are in line with Robeco's 2009 views. For the energy sector, we saw huge investment opportunities, due to the combination of scarcity of resources, climate change, regulatory initiatives, countries seeking security and reliability of energy, and increasing demand for clean and efficient energy. In terms of infrastructure, we expected emerging economies to enhance their infrastructures to serve their growing populations, while developed countries would replace their obsolete and energy-wasting infrastructures.

Which asset classes, sectors or countries did Robeco see as its least successful in terms of investment 2009?

We saw relatively disappointing returns for government bond funds in 2009.

Government bonds have been regarded as safe-haven assets. However, the Dubai World incident reminded investors that government-related entities do not automatically have government guarantees. Besides, the ultra-low interest rate environment is not favourable for government bond fund returns. As the inflationary risk in the short term is marginal, there is no reason for the major central banks to lift rates within the next six months.

Although Japan had recorded remarkable growth in third quarter of 2009, worries over the country's creditworthiness are emerging and will continue. Our funds with significant allocations to Japan suffered from the country's economic environment, the strong yen and domestic deflation last year.

Which asset classes, sectors or countries are most likely to offer the most potential in 2010, and why?

Compared to developed markets, the macro factor remains positive for emerging markets. The sound financial position, large foreign exchange reserves and low corporate and government debt levels in most emerging countries contribute to our favourable outlook. Some emerging markets still have room to maintain loose monetary policies, and that will help maintain their growth while they switch focus from export growth to domestic demand.

We still like China, as the global recession is a unique opportunity for the country. Its State Council re-emphasised the focus on stimulating the economy through easy monetary and fiscal policy, which has effectively restored domestic confidence. A healthy banking sector, a strong government and high consumer savings mean China has become the first economy to recover from the credit crisis. An 8% growth promise can be kept and even surpassed without the export side providing a strong catalyst.

Globally, energy and IT are our preferred sectors. The case for energy has weakened somewhat lately as both earnings revisions and short-term momentum have been disappointing compared with other sectors. However, energy has a low absolute valuation. Despite its defensive characteristics, the sector benefits from positive economic surprises that stimulate the oil price.

We think IT will outperform the market in 2010. The sector has shown above-average earnings revisions for several months in a row. The relative price-to-earnings ratio to the market has been coming down now for almost a decade and is back at pre-internet bubble levels at 16x expected earnings compared to 15-16x for the market. The IT sector underperformed the market from 2000-2006, and has since then been more or less in line with the market. Now that the economy is in a moderate recovery mode, the introduction of Windows 7 might spur the sector, as 80% of business PCs still run Windows XP.

Looking at performance over decades, the materials sector has not matched the market's performance, despite its decent performance recently. We think the materials sector will get support for its long-term relative performances because of industry consolidation. We believe natural resources has a good investment perspective.  

Which asset classes, sectors or countries are likely to offer the least investment potential in 2010, and why?

The macro outlook for Japan is poor. The recent strength of the yen adversely affected the country's outlook. Under huge pressure from the Japanese government, the Bank of Japan has reluctantly introduced a limited quantitative-easing programme to boost liquidity. Besides, with headline deflation reaching 2.5% in October, worries about the economic recovery in the country are intensifying. Although the local government may introduce a new stimulus package, its flexibility is limited by the country's relatively high debt ratio.

In addition, worries about Japan's creditworthiness are emerging and are likely to grow in the near future. However, Japan's equity market is now the world's cheapest on cash flow multiples, offering good opportunities for stock-pickers.

In the medium to longer term, government bonds are unattractive, as the scarcity theme could well return from 2011 onwards, pushing up inflation. Rising debt-to-GDP ratios may also take their toll.

The real estate sector has been at the centre of the credit crisis, and conditions are still tough for the sector. Industry executives expect an increase in distressed sales in most commercial property markets. In addition, while analysts are upgrading their expectations for equities, their forecasts for real estate investment trust earnings have limited changes.

Consumer discretionary and financials are unattractive. Consumers are still inclined to de-leverage, while we think the sector's valuation is demanding. Financials have faced some headwinds in the form of negative news flows and weak relative short-term momentum. The assessment by the International Monetary Fund's Dominique Strauss-Kahn pointed out that around half of banks' losses from the financial crisis have yet to be revealed.