Monthly outlook july 2014

MONTHLY OUTLOOK JULY 2014 For professional investors

UK rate rise imminent?    

British economy surprises by quickly firing on almost all cyclinders Bank of England Governor preparing the ground for first hike Macro outlook: world economy strengthening but EU disappoints Asset allocation: we are now overweight cyclical stocks

Topic of the month: BoE won’t wait long to raise rates The UK economy has shown surprising strength in 2014 and is now firing on almost all cylinders. It is expanding at an annualized rate of 4% and jobs are growing at a record pace. Average house prices have risen strongly. Not surprisingly, London has seen the strongest gains of 26% in the first half of 2014 according to the mortgage lender Nationwide. But all UK regions have experienced growth. The average UK house price rose 12% in the year to June, passing the previous peak in 2007. Bubble fears are understandable. It was therefore no surprise that in his annual Mansion House Speech of June 12, the governor of the Bank of England (BoE), Mark Carney, explicitly stated that the first rate hike since the base rate was frozen at 0.5% more than five years ago could happen sooner than markets expect. This comment didn’t fall on deaf ears, so Carney found himself almost immediately forced to weaken the impact of his remarks by stressing that the ultimate decision would be datadriven. So much - again - for forward guidance. Of course, central banks no longer consider it their primary task to take away the punch bowl just as the party gets going. They’ll now do their utmost to err on the side of caution and not hinder the recovery.

Asset price inflation is clearly being used by central banks as a means to stimulate the wider economy into a self-sustaining recovery. But, of course, things can get out of hand. The first line of defense for

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the BoE concerning the housing market is to introduce limits on the degree to which banks can operate in the risky sections of the mortgage market (so-called macro prudential measures). The BoE has now reintroduced a ‘corset’ for banks, but as the Economist magazine wittily remarked: "As corsets go, this is not unduly tight." It won’t take away the need for a more generalized measure such as a rate hike. A conventional ‘Taylor rule’ – used to calculate the level of rates that will stabilize the economy in the short-term but still maintain long-term growth - suggests a BoE rate of 3.0% would be appropriate. That’s 2.5% higher than the current rate - but then the Taylor rule is, of course, only a rule of thumb and conditions in the world economy are far from normal. “Lots of nutty things are still happening,” the BoE’s chief economist Andy Haldane said recently, justifying its extremely loose policy stance.

UK consumer price index has mostly fallen in recent years

As Carney rightly stated in his Mansion House speech, the timing of the first rate rise is less important than the path that is followed thereafter. This would call for an earlier move, accompanied by dovish forward guidance. Such guidance would be necessary, because the UK economy could not withstand sharp rate increases due to the high level of indebtedness of the private sector. Private nonfinancial sector debt is currently a hefty 163% of GDP. Of course, the European Central Bank (ECB) is still in easing mode and the US Federal Reserve (Fed) is in no hurry to tighten; sterling has appreciated in the past year by around 10% and political risks have exacerbated worldwide. So the external environment doesn’t exactly make the first UK rate hike urgent. With still relatively low inflation and very modest wage growth (the ultimate Source: Bloomberg, Robeco anchor), the internal environment doesn’t warrant a sudden hike either. Our baseline scenario foresees no oil price hike, and a further strengthening of the US and Eurozone economies. We can therefore expect more speculation about the first rate hike in the US and no generalized quantitative easing in the Eurozone. Consequently, the external environment would allow for a first UK rate hike of a modest 25 basis points in the fourth quarter of 2014, followed by an additional 25 basis points in the first quarter of 2015. Ten-year yields (currently 2.75%) on British gilts should rise above 3.0% before year end and sterling should show continued strength vis-à-vis the euro. Scottish independence and a ‘Brexit’ remain worrisome.

Though the going seems good in the shorter term for the UK economy, a more long-term worry is the risk of the economic impact of Scottish independence and/or of the UK leaving the EU in the coming years in the so-called ‘Brexit’. A referendum on whether Scotland should secede from the UK will take place on 18 September 2014. As the size of the Scottish economy is relatively small compared to the rest of the UK, the economic impact of the undoubtedly messy divorce will be relatively small. But the increase in political risk could hit sterling, at least for a while. A detailed analysis of opinion polls suggests that a significant Scottish minority supports a separation. Independence is therefore unlikely. If it does materialize, it would increase the risk of the remainder of the UK leaving the EU if only because Scotland is a Labour Party stronghold. At present, the pro-EU Labour opposition has 41 members of Parliament in Scotland compared to only one for the more anti-EU Tories who lead the current British government coalition. The UK Tory prime minister has promised a referendum on continuing British membership of the EU if the Tories would win the general election, which is most likely to be held on 7 May 2015. Labour won’t hold a referendum. The benign economic environment would make a Tory victory seem very likely, but that is certainly not guaranteed. The current PM is unpopular and the rise of the anti-EU United Kingdom Independence Party (UKIP) could split the right-wing vote. The strong showing of UKIP in the European elections isn’t particularly significant, as this was a cost-free opportunity to express voter dissatisfaction with Brussels. A general election is an

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altogether different matter and the result is very difficult to call. We attach therefore a probability of 50% of an EU referendum. Leaving the EU would clearly not be in the interest of the UK economy – the German newspaper FAZ aptly called such a move as an example of ‘Selbstverzwergung” (turning yourself into a dwarf). The UK would leave the largest internal market in the world and the EU won’t necessarily make its life easy. Foreign direct investment into a marginalized UK would be likely to fall as the continental EU would be the preferred destination for investors. Enlightened self-interest would suggest a majority of UK voters to reject a Brexit. We therefore attach a low probability of about 20% of a Brexit occurring in the coming years.

Macroeconomic outlook: world economy strengthening The world economy ended the second quarter on a strong footing, led by the UK and the US. The recovery in the Eurozone has continued, although Germany weakened somewhat and France contracted further. Growth in China and India strengthened and the Japanese economy is showing signs of stabilization.

Eurozone economic momentum is slowing: fiscal loosening in the periphery is likely Forward-looking indicators for the Eurozone economy have disappointed recently. The German producer confidence index weakened in June, especially the ‘expectations’ component. Most of this can be attributed to the rise in geopolitical risk (Iraq, Ukraine) to which the export-oriented German economy is especially vulnerable. For Ukraine we expect a continuation of the current stalemate, while in Iraq, increasing foreign intervention will probably contain the ISIS insurgency. We therefore expect geopolitical tensions to decrease.

German producer confidence is weakening

Source: Bloomberg, Robeco

The European recovery is of course supported by the compression of sovereign bond yield risk premia engineered by the firm commitment of the ECB to use generalized quantitative easing if the need arises. The lowering of the Italian economic growth forecast to a meager 0.2% for 2014 by the Italian employers federation Confindustria is worrisome.

Fortunately, an understanding has been reached at the highest European political level to make best use of the “flexibility that is built into the existing Stability and Growth Pact rules”. In exchange for ongoing structural reform, more fiscal flexibility will be possible, enabling taxes to be lowered in Italy and Spain, bolstering political support for both governments. The conditional loosening of budget rules also gives the French government an incentive to finally speed up reform. We continue to expect stronger growth in the euro area in 2015 compared to 2014.

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Asset allocation – risky assets remain supported as summer begins Performance of asset classes (gross total return) – stocks are again flavor of the month

Source: Thomson Reuters Datastream, Bloomberg, Robeco

High yield remains our favorite, but sword is double edged We retain our positive view on high yield compared to government bonds, as central banks in developed markets continue to worry about the lack of inflation, confirming that they remain in easing mode. The recent ECB easing measures are an additional push for risky assets and Fed chairwoman Janet Yellen indicated in a recent speech that she does not see excesses in the high yield market and will not pierce eventual bubbles by using the interest rate weapon. Although the latter remains to be seen, in the meantime the search for yield can continue in a market that seems assured of central bank forward guidance. Also, the slow recovery and benign inflation environment remain positive for high yield.

Appetite for the asset class in this environment remains healthy. Returns in June on high yield were stronger than the previous month, helped by lower Treasury rates. Meanwhile, spreads in the global high yield index have fallen to 351 basis points, below the historical average. Nevertheless, low spreads seem justified by historically low default rates which fell even further last month from 1.53% to 1.39% - well below the global average of 4.59% since 1998 - while the recovery rate for senior unsecured loans remains favorable at 45%. However, the high yield story remains a double-edged sword; valuations in combination with subdued volatility in the high yield market (and risky assets in general) seem to indicate some degree of complacency among investors.

We remain vigilant due to several developments that have increased the vulnerability of the asset class in the medium term. First, investors are willing (and increasingly so) to pay a relatively high price for additional carry, pushing up valuations. Second, leverage on high yield balance sheets is increasing. This does not pose an immediate threat as long as cash flows remain healthy and capital market rates are subdued. Also, refinancing risk is moderate in the near term because many firms have managed to secure cheap funding for longer in the current rate environment. However, liquidity risk could become more pronounced in the medium term. The Bank of England fired a warning shot last month by pointing out that investors are currently not fully compensated for liquidity risk in the high yield market. Another point of concern remains the level of covenant-lite high yield issuance and the increasing leverage of issuing firms which makes the market less attractive compared to a year ago.

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For investment grade credits, we maintain the Default rates for high yield remain low view that, when corrected for risk, high yield remains more attractive than the ultra-low rates that investment grade offer. We do observe however that the credit spread of high yield has already compressed to 2.5 times the investment grade credit spread. This is well below the past 20-year average of 4 times.

But as yields in the euro investment grade market are now even below those of a global government bond index, neither the yields nor the spreads look relatively attractive to us. The spread component is priced for perfection.

Downside risk has become more substantial as the recovery in the periphery looks promising, but it still has a long way to go and won’t be Source: Bloomberg, Bofa ML, Robeco without a glitch. Higher credit spreads may ensue if banking stress test results disappoint later this year. The bottoming out of disinflation in the Eurozone could push nominal capital market rates higher, eating into the remaining spread buffer of investment grade bonds.

We remain optimistic about equities

Global cyclical adjusted PE: stocks expensive but not overvalued

Global equities continued their rally and gained 1.5% in June. Recent geopolitical developments have not hindered the rally; neither the surge of the Sunni-Shiite conflict in Iraq, the Poroshenko offensive in Ukraine or the Q1 contraction of US GDP to 2.9% (year-on-year) have shown to be roadblocks. Market indicators show the Ukrainian conflict in its current form is not at the forefront of market interest any more. Russian credit spreads have almost returned to pre-crisis levels. A worldwide oil price supply shock from the Sunni-Shiite conflict is less likely as the bulk of Iraqi production is concentrated in the relatively Source: Datastream, Robeco quiet south. Meanwhile, volatility is very low and previous low volatility episodes indicate that this can be extended for much longer. From a forward-looking macroeconomic perspective, developments have been benign for equities as capital markets have declined, while leading indicators in the US and China suggest expansion. For the US, this story has translated into positive earnings surprises. The latest indicators show the worst decline in macro momentum may be behind us. Although the longer-term risk of a slowdown in China has not disappeared, there is reason to be more constructive on China in the medium term. With central banks still in easing mode and the macro picture improving, the equity market remains supported as we enter the summer holidays.

Judging from low volatility and the strong consensus about risky assets, the risk remains that the market is getting too complacent and will be caught by surprise later on.

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Low capital market rates support profit margins, but no room for further expansion In general, earnings expectations from analysts have been too optimistic. The recent decline in capital market rates and still-benign wage growth will continue to support profit margins. We will continue to watch interest rates and wage growth developments closely as we think these are key variables for the earnings story.

Real estate still has momentum

REITs outperform equities as interest rates decline

Real estate keeps performing well but underperformed equities in June. A positive sentiment towards the more conservative part of the risky asset spectrum has sustained real estate performance since the start of the year, resulting in a year-to-date performance of 10.1%. The unexpected rally in Treasuries is clearly one of the driving factors behind this performance. The Eurozone real estate market seems less sensitive to the rate developments in the US, especially as the ECB took further easing measures last month.

Given our expectation for rising interest rates as the economic recovery in developed markets picks up pace in the second half of the year, we remain underweight in real estate compared to equities. Our quant Source: Bloomberg, Robeco models also give a short signal for real estate in the US. Nevertheless, momentum and sentiment remains quite positive for the real estate market in the short term. However, from a valuation perspective, real estate is expensive compared to equities, especially in the US and Japan. This valuation gap is compensated to some extent by higher dividend yields.

Emerging market debt prospects have improved

US Treasury market remains calm ‌ and so do emerging market currencies

We are now neutral on emerging market debt (EMD) compared to high yield, because the attractiveness of EMD has increased markedly due to the combination of higher carry and lower currency volatility.

EMD again generated a positive monthly return in June, helped by improving investor sentiment towards the asset class.

Valuations have also become more attractive as spread compression has been relatively lower compared to the high yield market. Also, EMD spreads are not at historical lows.

However, we are not outrightly positive as there is a reason for the relatively lower Source: Bloomberg, Robeco spread compression. Current account deficits in emerging markets are still significant from an historical perspective and a further adjustment process could require further depreciation of currencies in the medium term. Currency volatility has also coincided with the decline in US Treasury volatility, which could resume. If rates rise in the US, as we expect in the remainder of this year, the asset class is still at risk.

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Meanwhile, the latest leading producer confidence figures suggest that the deceleration in economic activity versus developed markets has not ended, although it may bottom out in the second half of 2014. This is partly the consequence of recent rate hikes seen in Brazil, Russia, South Africa and Turkey to defend their currencies from further depreciation. Although further rate hikes are not on the cards (Mexico and Hungary have even eased), inflationary pressures are not abating and will cause downward pressure on currencies further down the road. As energy consumption per head in emerging economies has been rising steadily over the years, they remain vulnerable to rising oil prices, as has been seen recently. Political risk has not vanished either, although election outcomes have been benign and have not been triggers for renewed volatility thus far. Emerging market policy makers thus have the complex task of managing a tricky balancing act between external and internal stability. We expect continuing divergence within emerging markets according to differences in export orientation, current account balances, fiscal and monetary policies, and political stability.

Government bond markets will face headwinds as growth gains momentum

The German 10-year bond yield is still well below fair value

We remain negative on government bonds as we expect nominal rates in developed markets to rise later this year. From a valuation and macroeconomic perspective, the outlook is clear: rates should go up.

Consumer price inflation figures are well below the mandates of central banks in the Eurozone and US, but we have already seen higher producer prices and firming wage growth in the US. In the Eurozone, we expect disinflation to bottom out in the coming months, helped by higher energy prices. Also, real rates in the market are too low when compared to the strengthening growth in developed market economies, despite declining macro momentum in the Eurozone.

However, momentum and sentiment factors have kept Source: Bloomberg, Robeco rates in developed markets lower than we expected at the start of the year. The cold winter in the US and a mixture of investor positioning, safe haven flows and continuing disinflation in the Eurozone are explanations for the shift in sentiment towards government bonds. Another factor is the fact that volatility-adjusted carry for emerging market investors has improved, exercising downward pressure on developed markets rates.

With more upbeat economic data ahead, we expect rates to rise towards 3% by the end of 2014 in the US. Although the Fed has reiterated its accommodating stance, improving wage growth and higher inflation numbers will make the ‘lower for longer‘ message from Yellen harder to maintain as we enter the second half of the year. The Fed is unlikely to change the pace of tapering from the current level of USD 10 billion/month. High yield bonds have better relative risk/return profiles. We therefore prefer non-investment grade corporate bonds to government bonds as high yield provides a decent spread buffer against rising interest rates.

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Oil price rises due to Iraq conflict

Iraqi oil production declines in reaction to ISIS

We remain neutral on commodities. After commodity prices fell 2.9% in May, losses were reversed with a 2.0% gain in June, mainly driven by an upturn in the energy complex. After remaining largely flat since the start of the year, the oil price has moved to a higher bandwidth between USD 110 and USD 115. Although the tensions around Ukraine have abated somewhat, the unexpected surge of ISIS militants in Iraq has led to a higher risk premium in the oil price. Also, seasonal demand is picking up as the refinery maintenance season is behind us. Commodities have gained investors’ attention since the start of the year because of the increasing decoupling of their correlation with other asset classes.

Source: Bloomberg, Robeco

We do not expect the oil price to reach new peaks because the bulk of Iraqi production takes place in the south, which is currently not under ISIS control. In the unlikely event that total Iraqi oil production gets disrupted, strategic OPEC reserves will be released to rebalance supply. The three main drivers this year of commodity prices - extreme weather, geopolitical risk and worries about the Chinese growth path - remain largely intact, making different impacts on different commodities within a broad index. Agricultural commodity prices declined notably in June, with corn and wheat dropping more than 9%, largely due to improved crop yield prospects in the US. Although momentum and sentiment are still favorable for commodities, the current environmental and geopolitical pictures still continue to affect different commodities in different ways. This makes us cautious to enter into an overall overweight commodity position, although historically the current phase of the global economic recovery has traditionally been supportive for the asset class.

Regional asset allocation – we remain overweight emerging markets European equities performance lags other major regions

MSCI AC World unhedged EUR; index weights between brackets Source: Thomson Reuters Datastream, Robeco

We are overweight emerging markets as we believe that relative valuations are favorable. Emerging market equities still trade at a discount of 25% to those in developed markets on a number of valuation metrics. Momentum remains positive as well, returning more than 2% in June. Sentiment is positive but remains vulnerable due to the discussion about Fed policy and political risk in what has been a crucial election year for many emerging markets. However, the country composition of emerging market equities is less sensitive than that of emerging market debt, due to the potential currency impact of perceived Fed tightening. We are more cautious on the fundamentals as we do not think that emerging markets are yet experiencing a structural recovery. Economic activity is still subdued, but China is showing modest expansion after stimulus packages and the end of the growth

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deceleration in some emerging markets versus developed markets could take place in the second half of this year.

We remain neutral on North America, where momentum is favorable but valuations remain the highest of all regions. We also observed that earnings revisions for US companies did not improve further in June, although the US is still the only region with positive earnings revisions on a 3-month horizon. US non-farm payroll numbers showed continuing improvement in the labor market and manufacturing sector activity showed accelerated expansion. Earnings growth will be firmed by improving retail sales and positive feedback effects from lower capital market rates in the US since the start of the year. However, a further contraction of earnings multiples in the US will be difficult given the overall positive sentiment, an apparent complacency in the market about risks, and diminished room for further expansion of profit margins from peak levels. Some labor market indicators show that wage growth is picking up, although the recovery in wage growth is uneven as 15.8% of the working population in the US did not receive higher wages last year, a proportion which is still at historically high levels.

North America shows the most positive earnings revisions Earnings growth (%)

Earn. rev. index

P/E on 12m fwd earn.

FY1

FY2

12m

3m

1m

Current

10y avg.

North America Europe Pacific Emerging Markets

8.7 7.8 7.2 9.1

11.3 12.7 9.8 11.1

10.1 10.1 7.7 10.1

8.8 -22.6 -5.9 -13.4

3.5 -19.5 -5.8 -13.1

15.9 14.3 13.9 10.9

14.0 11.8 15.0 10.8

AC World

8.3

11.4

9.8

-6.3

-8.4

14.5

13.1

Earnings and valuation data of regions (MSCI AC World). The earnings revisions index is calculated by using the difference between the number of up- and downward revisions relative to the number of total revisions.

Source: Thomson Reuters Datastream. Robeco

Europe: equity valuations are less favorable We are negative on Europe. Although sentiment remains positive as the ECB remains in accommodative stance, we noted that momentum turned negative last month. Valuations are high on a pan-European and on a cross-regional basis. Earnings revisions on a 3-month horizon, which have some predictive power for equity returns in the near term, are still the least favorable of all regions. The recovery in the Eurozone has diminished and downside risks remain with the possible impact of higher oil prices on the net-energy importing economy. Monetary stimulus by the ECB will only provide a mild boost for risky assets and will not likely change the overall corporate earnings picture in the medium term, although financials could profit. A further risk we see for Eurozone equity exposure is the toughness of the ECB stress tests for weak banks and the possible contagion risks stemming from any defaults, especially because the fixed income markets in the periphery are currently priced to perfection. Also, Europe remains relatively more vulnerable to a negative supply/demand shock from renewed sanctions if Russia retains its passive-aggressive stance towards Ukraine.

Asia Pacific: third pillar of Abenomics remains a worry The Asia Pacific region was the strongest performer in June. We retain our neutral stance on Asia Pacific because we see few signs of the necessary improvement in the third pillar of Abenomics – bringing structural reform to Japan - particularly as Japanese Prime Minister Shinzo Abe has made a nationalistic move by giving the country’s military more powers. As inflation increased to 3.7% - the highest level since 1991 - real wages fell further in Japan, restraining the spending power of domestic consumers. The leading Tankan survey showed a mixed picture for the corporate sector, which expected a slower pace of earnings improvement, although investment spending is expected to improve. Further yen weakening could emerge as a result of action by the Bank of Japan (BoJ),

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although upward corporate earnings revisions for Japanese exporters will eventually run into diminishing returns. A stronger US dollar later this year could also help Japanese exporters. Equity valuations for Asia Pacific are still comfortably below their 10-year averages, but the earnings picture is not improving as Asia Pacific again saw a further decline in earnings revisions this month.

Sector allocation – we are now overweight cyclicals Consumer staples sector has entered negative territory

MSCI AC World unhedged EUR; index weights between brackets Source: Thomson Reuters Datastream. Robeco

We now prefer cyclical sectors where momentum has improved. The potential for cyclical outperformance is also highly correlated with macroeconomic surprises. We have seen such surprises pick up more notably in recent weeks, for instance in the non- farm payrolls number which showed 288,000 new jobs were added to the US economy in June. We expect the US economy to accelerate further in the second half of this year. Earnings revisions for cyclicals improved relative to defensives and are almost turning positive. These developments, together with the continuing search for yield and accommodating central banks, make us more positive on cyclicals.

Cyclical sectors versus defensive sectors – improved earnings revisions for IT sector Earnings growth (%)

Energy Materials Industrials Consumer Discr.

Consumer Staples Health Care Financials IT 13.4 Telecom Services Utilities AC World AC WORLD REITS

Earn. rev. index

P/E on 12m fwd earn.

FY1

FY2

12m

3m

1m

Current 10-yr avg.

9.4 16.0 13.2 8.4 4.8 8.9 7.8 11.2 -2.3 -0.4

5.4 16.0 13.2 15.7 9.9 11.2 12.2 12.1 7.7 8.4

7.2 11.5 12.7 12.6 8.4 10.5 9.8 12.8 1.0 2.8

3.8 -15.3 -7.4 -16.9 -22.8 -7.1 -0.8 10.4 -28.4 0.9

-0.2 -18.4 -9.6 -17.9 -21.0 -5.2 -3.2 15.0 -25.9 -0.2

12.8 14.3 15.5 15.3 18.1 17.0 12.2 15.5 15.0 15.4

10.8 12.1 14.1 15.2 15.8 14.3 11.3

8.3

11.4

9.8

-6.3

-8.4

14.5

13.1

-13.6

1.2

-6.8

0.2

0.2

30.1

N.A.

13.7 13.8

Earnings and valuation data of sectors (MSCI AC World). The earnings revisions index is calculated by using the difference between the number of up- and downward revisions relative to the number of total revisions.

Source: Thomson Reuters Datastream. Robeco

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Position in the economic cycle – we continue to foresee a gradual recovery Macroeconomic scenarios and Robeco’s view versus consensus The world economy is developing positively, led by the US and the UK. Our baseline scenario foresees a further gradual recovery. 'Abenomics' is running into difficulties now that the VAT hike has kicked in. The Japanese central bank will eventually act energetically to weaken the yen. The Chinese authorities have quietly implemented a successful mini-stimulus. The Eurozone continues to show a gradual, broad-based improvement, although momentum has weakened recently. Our alternative, pessimistic scenario foresees a weaker global economy caused by slowing growth in Asia. In a positive scenario, the world economy is showing surprising strength, but central banks are unwilling to act correspondingly. As a result, inflationary risks will increase.

Position in the economic cycle – Europe lags other major economies

Macroeconomic scenarios: a gradual normalization is the most likely outcome Fall back

Asian slowdown (25%)

Relaunch

Gradual normalization (60%)

Behind the curve (15%)

Source: Robeco

Robeco’s expectations for growth are higher than consensus for the Eurozone, UK and Russia GDP growth by region (%) US Eurozone UK Japan China India Brazil Russia

2013 1.9 -0.4 1.8 1.7

2014 2.2 1.1 3.0 1.5

7.7 4.6 2.3 1.5

7.4 5.0 1.3 0.5

2015  -1m 2014 3.0 -0.3 1.5 0.0 2.5 0.1 1.2 0.0 7.2 4.7 1.8 1.8

0.1 0.0 -0.5 -0.2

Robeco* = + + = = = +

* indicates whether we expect a higher (+), matching (=) or lower (-) growth rate than the current consensus

estimate for 2014 Source: Consensus Economics, Robeco

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Robeco’s expectations for inflation are lower than consensus for Japan CPI by region (%)

2015  -1m 2014

2013

2014

Robeco*

US Eurozone UK Japan

1.5 1.3 3.1 0.3

1.8 0.7 1.8 2.7

2.1 1.2 2.0 2.1

0.1 -0.1 -0.1 0.0

+ = = -

China India Brazil Russia

2.6 9.5 5.9 6.5

2.5 9.5 6.4 6.8

3.0 8.0 6.2 5.5

0.0 0.0 0.0 0.3

= = + =

* indicates whether we expect a higher (+). matching (=) or lower (-) inflation rate than the current consensus estimate for 2014 Source: Consensus Economics. Robeco

Robeco’s multi-asset management approach Input factors for our investment policy

Our expectations are based on qualitative and quantitative analyses. Our starting point is to look at the long-term macroeconomic environment. We then determine our expectations for the economy for the next three to six months to find out which developments could take the market by surprise, as this is a common factor for all asset classes. This macroeconomic analysis determines our initial preference in terms of assets.

Next, we challenge our macroeconomic analysis with input from financial markets. Here, we take valuations into account as at extreme levels this might cause the performance of an asset class to change direction.

Sentiment also plays a role as markets tend to extrapolate shorter-term trends if investors put too much weight on recent developments. Finally, we use quantitative models to steer our expectations.

Macro

Models

Valuation

Sentiment

The table below shows our current multi asset allocation table.

Closing date for text: 04 July 2014. We refer to calendar months in all our data tables.

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Robeco Investment Solutions and Research Jeroen Blokland, Emerging markets LĂŠon Cornelissen, Chief Economist Lukas Daalder, Equities Ernesto Sanichar, Currencies Ruud van Suijdam, Real estate Peter van der Welle, Strategist Shengsheng Zhang, Commodities

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