Learning from history: Short-term vs. long-term impacts

4 minute read

The annual Aegon Asset Management Seminar, held on 8 November, combined historical perspectives with calculated forecasts to provide clients with greater clarity on what is to come in 2020, and beyond.

As long-term investors, we seek to balance the impact of relatively short-term investment considerations with broader, structural forces that shape the global landscape. Our annual seminar kicked off with Aegon AM experts sharing their vision for the company and expected returns, guest speaker Peter Frankopan then transitioned to provide the audience with a broad, historical context and it concluded with an interactive panel discussion with industry peers.

After a brief introduction from our CEO Bas NieuweWeme, our CIO Olaf van den Heuvel addressed the investment outlook for 2020, citing the cyclical components that are influencing strategic portfolio allocation. "Financial markets are living organisms," Van den Heuvel emphasized, and demographics are also having a remarkable impact on how markets are functioning. "Those active in the labor force are the ones who are willing to invest in more efficient labor environments, and that group of people is decreasing in Europe" Van den Heuvel explained. "This means that demand for money is relatively low and supply is extremely high due to the European Central Bank monetary policy. Inflation and the labor force move in tandem, and the shift of production labor to cheaper countries is therefore having an adverse impact on inflation rates."

In light of this, Van den Heuvel sketched two plausible scenarios for 2020-2023. The positive scenario ensues if the US / China trade dispute is resolved (or does not escalate) and there are no market shocks, allowing growth to remain close to its current level. The negative scenario prevails if the trade dispute escalates, thereby inflicting a damaging blow to investor confidence and global market sentiment. Regardless of whether investors are faced with a positive or negative short-term scenario, demographics will be a negative force on expected returns for many years to come, according to Van den Heuvel.

The advent of China on the global stage will also be a factor affecting long-term investment strategies. This shift has forced scholars and investors alike to reassess the Eurocentric narrative, which remains dominant. "Reading the tea leaves is worth the time. People can sense that we have reached a crucial turning point, and are questioning how we got here," said Peter Frankopan, Professor of Global History at Oxford University and the author of The New Silk Roads. "The knowledge base that we are inheritors of all has to do with understanding how these big global markets work and connecting that to the fact that things that are valuable have typically come from the East, understanding which cities to trade with, how to strike advantageous terms and where the competitive advantage is. These are all considerations that we use today to make investment decisions."

Frankopan reinforces the fact that the real story is always about trade and demand. However, Europe is no longer what it once was. "There is constant change. You do not hold your place forever." Frankopan's expression resonated, considering that the world would commemorate the 30th anniversary of the fall of the Berlin wall. Perhaps the most tangible way to illustrate macroeconomic change, is by considering that while G7 countries generated close to roughly three quarters of the global GDP in 1990, the Emerging 7 (China, India, Brazil, Russia, Mexico, Turkey, Indonesia) were responsible for over half of global GDP in 2014. Frankopan is careful to emphasize that this is not just a "China story", citing that the fastest growing economies are found on the African continent and in South East Asia (India).

Frankopan warns that China – how it functions, its policies, and its goals - is extremely complex, and trying to simplify it is not wise. China's Belt and Road Initiative is one such development that has garnered much justified attention. The ambitions surrounding the initiative are grand and multi-faceted, making it difficult to distill exactly what the ramifications will be. "I like investing in things that I understand and that are stable," said Frankopan, and while Dutch mortgages may be most appealing in that sense, there are a plethora of other opportunities that investors should consider and become more familiar with.

To round off the Seminar, Olaf van den Heuvel led a panel discussion with Peter Frankopan, Hendrik Jan Tuch (Head of Fixed Income, Aegon AM), Lukas Daalder (Chief Investment Strategist, BlackRock) and Mary Pieterse-Bloem (Senior Global Head Fixed Income, ABN AMRO Private Banking). It was a unique opportunity for different industry leaders to collaborate in a dynamic, inclusive setting to predict 'the biggest surprises to come in 2020'.