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By how much will interest rates continue to drop? What is the economic fallout of the coronavirus pandemic? What is our current view on globalization? And what are the consequences for the Netherlands of tomorrow? We will explore these issues here.

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Are transfer passengers at Schiphol airport really that beneficial to the Dutch economy?

Published on: 23 June 2022

Topical issues in the field of economy, (responsible) investment, pension and income: every week, one of APG's experts provides a clear answer to this week's question. In this edition: Thijs Knaap, Chief Economist at APG, on the benefits of the much-discussed hub function of Schiphol airport for the Dutch economy.

Personnel shortages, long queues, the cancellation of flights. Schiphol airport has been a hot topic in the news again lately. An element of discussion here is whether or not the airport should fulfil a hub function. For a significant portion of the passengers, Schiphol airport is not their starting point or final destination but they only use the airport to transfer flights. In 2019 this involved more than one third of the 71 million passengers calling in at Schiphol airport. Are all of those transfer passengers really that beneficial to the Netherlands?

Network effect
According to Knaap, two elements are of importance. “The first element are the transport costs, meaning how much it costs to travel from the Netherlands to a foreign destination and vice versa. When a country has a large airport, such as the Netherlands has with Schiphol, the transport costs to that country are low because there's a bigger chance of direct flights and several airlines are competing with one another. Good accessibility is an advantage, economically speaking. The second element are the so-called network effects. That network effect enables a city or country to attract activities. If you are the first or most important company somewhere, the rest will come to you. There's not a lot to gain from the transfer passengers themselves, but the hub function does ensure that many airplanes travel through Schiphol, meaning we are well accessible as a country. Thanks to that network effect, more companies settle in the Netherlands providing more growth. If that's the goal, good connections are essential.”

Goal
It's difficult to say what the gain of such hub function is in a direct sense, Knaap says. “The few euros you earn for each transferring passenger will not make the difference. You could say that accessibility is the gain that eventually ends up with, for example, companies that benefit from it, with the Dutch holidaymaker who flies abroad easily and quickly and with the government by means of extra tax income. A part of that gain can be attributed to an increase of prosperity and that is difficult to measure. That also brings us to the point that the many flights from and to Schiphol airport also contribute to environmental pollution and noise nuisance. Those arguments are mainly presented when it comes to the transfer passengers at Schiphol airport, because they don't generate money for the Dutch economy. That's why many people ask themselves: ‘What is the actual usefulness of the hub function?’ But the goal is not the people transferring flights, the goal is the fact that the airplane flies to Amsterdam. The fact that an airplane departing from America or Asia arrives in Amsterdam is what makes the transport costs lower for the Netherlands and that's what it's all about.”


The considerations in favor of and against a hub function are changing over time though, Knaap says. “Thirty years ago, the general tenor was: ‘Let's build yet another landing strip’. The argument used in the past to make Schiphol airport grow, more employment opportunities, is less powerful since there are enough jobs available in the Netherlands. At the same time, we are currently dealing with housing shortages and more attention is paid to the environmental pollution and noise nuisance caused by Schiphol airport. That can also be seen in the debates where the general tenor now is: Just have Schiphol airport shrink.”

Balance
The millions of transfer passengers at Schiphol airport are therefore not directly beneficial to the Dutch economy. The hub function does ensure low transport costs and a possible network effect, advantages that are difficult to quantify. A balance between, on the one hand, the desire to maintain the hub function and, on the other hand, to decrease the number of flights, is difficult, according to Knaap. “You cannot say that by cancelling 50 percent of the flights, you will still have half of your hub. It would mean the hub no longer exists, because you need a minimum number of transfer flights. But it continues to be a guess how many flights would be needed to maintain the hub function.”

Volgende publicatie:
Thijs Knaap on BNR Newsradio about higher interest rates

Thijs Knaap on BNR Newradio about higher interest rates

Published on: 13 June 2022

On Thursday, the European Central Bank announced its first rate hike in 11 years. APG's Chief Economist Thijs Knaap spoke about it on Monday in the radio program BNR's Big Five.

 

The higher interest rate means in any case that the funding ratio of pension funds will rise. "That leaves more room to increase pensions," Thijs says in conversation with presenter Paul van Liempt. The question is whether this will be sufficient, because pensioners have to deal with rising prices. "The moment the funding ratio remains high long enough, the pension will also rise. Do rising prices and rising pensions cancel each other out altogether? If all goes well, yes, although it also depends on which pension fund you are with," says Thijs. He points out that the pension system is aimed at offering a good real pension, i.e. that the purchasing power of the pension is maintained as much as possible. "That system seems to be working, because we are now seeing the coverage ratios rise very quickly."

 

Caution
Compared to other major central banks, ECB President Christine Lagarde comes quite late with the announcement to raise interest rates. Thijs understands that caution. The economy is no longer the same as it was 11 years ago, "and you can't really know what the effect of the rate hike is until you do it. Then it is very wise to first raise the interest rate a little bit to see if it might have major consequences." Unlike the Federal Reserve, which is tasked with curbing inflation and combating possible unemployment, the ECB has only one explicit goal: to monitor price levels. Nevertheless, according to Knaap, they have a kind of shadow goal in Frankfurt, and that is not to cause too much damage to the economy when curbing inflation.

Listen to the entire broadcast here (Dutch). Also read ‘Five questions about the announced interest rate hike by the ECB’.

 

Volgende publicatie:
Five questions about the announced interest rate hike by the ECB

Five questions about the announced interest rate hike by the ECB

Published on: 10 June 2022

The European Central Bank (ECB) announced Thursday that it will raise interest rates next month. It is the first time in eleven years that this has happened. The aim is to curb high inflation. Five questions for APG's Chief Economist Thijs Knaap and Senior Strategist Charles Kalshoven.

 

Isn't the ECB a little late with this?

“In hindsight, certainly. Inflation has been way too high since last summer. Of course, it was not unreasonable for the ECB to initially estimate that inflation would fall again soon. A lot of inflation was related to startup problems after all the lockdowns. But yes, Ukraine has now been added, with a major impact on energy and food prices. There were also new lockdowns in a number of large production centers in China. It is clear that inflation will therefore remain high for longer. Other central banks have intervened before (such as the US and the UK) but you can argue that inflation in the Eurozone has so far been the result of external shocks, which the ECB cannot do much about.”

 

Why is the ECB taking the plunge now and not before?

“President Christine Lagarde herself previously indicated that the ECB would stop buying bonds in the third quarter. And that interest rate hikes would only come after that. To avoid unrest, the ECB wanted to be predictable and not to surprise the market. The disadvantage of this late intervention is that the interest rate will rise somewhat faster after this. Lagarde hinted that after a quarter of a percentage point hike in July, interest rates could rise by half a percentage point in September.”

 

Is there anything to say about how long it will take a rate hike to bring inflation back to the desired 2 percent?

“The ECB itself always talks about a pass-through of interest rate steps that is 'long and variable', one and a half to two years. But these are just the first steps now. Inflation is expected to remain high this year and next. The ECB itself thinks that inflation will be back at 2.1% in 2024. Market expectations based on traded inflation are somewhat above that. Where we arrive with the interest rate when inflation is stable is known among economists as the neutral rate. In a recent message on the ECB's website, Lagarde indicates that she expects the ECB to move slowly towards this neutral rate. But at the same time she indicates that no one knows exactly how high this interest is. So there is not much to say about it.”

 

Is this hold enough to bring inflation back?

“It will take a little more than just the announced interest rate steps of July and September. The ECB itself is also talking about the start of a process. It is true that the ECB can get help from a number of quarters. A recession would depress wages and energy prices. More pleasant – and less likely – would be: relaxation in the oil market due to rapid peace in Ukraine. Another possibility is that governments will interfere with prices. Think of subsidies or maximum prices. That is quite disruptive economically, so let's hope these weapons are not used too much. Ultimately, you also need some time to work inflation out of your system.”

 

It is the ECB's first rate hike in 11 years. How unique is this?

“Especially what you see in the rear-view mirror is unique. We have had ten years in which the ECB interest rate was zero or negative. The latter was not possible at all according to the economic textbooks. Mario Draghi was president of the ECB for eight years but never raised interest rates. His successor probably does. We're finally going back to normal. Borrowing money will cost money again, storing money will pay off again.”

Volgende publicatie:
What will we notice in the Netherlands of the discontinued gas supplies by Russia?

What will we notice in the Netherlands of the discontinued gas supplies by Russia?

Published on: 9 June 2022

Current issues in the field of economics, (responsible) investments, pension, and income: an APG expert gives a clear answer to the question of the week. This time: Marco van Eijkelenburg, Senior Portfolio Manager Commodities, on the question what the Netherlands will notice of Russian Gazprom discontinuing gas supplies to Dutch GasTerra.

 

The reason that the Russian state-owned gas company no longer delivers to the Dutch gas distributor as of June 1st is that it does not want to pay the bill in Rubles, something that President Putin is demanding. Poland, Bulgaria, and Finland have already been confronted with the Russian sanction. According to Environment Minister Rob Jetten, the decision by Gazprom will not have consequences for Dutch households. But not everyone is convinced of this. Mijnraad, an independent advisory body of the government warned that a gas shortage could have “very large social consequences”  The international energy agency IEA also warns for an energy ration.

 

Alternatives
Marco van Eijkelenburg points out that GasTerra already has alternatives for the Russian gas. “I therefore do not think that this action by Gazprom will have major consequences for the Dutch gas reserve, although GasTerra will have to pay more for those alternatives than for the Russian gas. With its gas roundabout [infrastructure interchange for transport and storage of natural gas], the Netherlands has a favorable position with respect to the gas supply. As a direct consequence of the Russian invasion in Ukraine, there will be an accelerated scale up of capacity to import liquid natural gas (LNG). Gasunie, the state-owned company that takes care of the Dutch natural gas transport has rented two floating LNG facilities to expand the new LNG terminal at Eemshaven.”

This terminal, with an annual capacity of 8 billion cubic meter, will become an important supply line, Van Eijkelenburg explains. “We use approximately 40 billion cubic meter natural gas in the Netherlands per year, of which approximately 15% comes from Russia. If needed, there is always the gas field below Groningen, although that is politically sensitive. If there is a shortage of gas this coming winter, the government will first disconnect large industrial users from gas so that the delivery certainty for households and specific essential social services, such as hospitals, can be guaranteed. So, the Dutch consumer does not have to worry about the delivery certainty; it does however have to worry about the gas price. Especially when there is a variable contract and a cold winter.”

That uncertainty about future gas deliveries can already be felt in the price

However, that higher price is not specifically caused by Gazprom discontinuing its delivery to GasTerra, Van Eijkelenburg emphasizes. “The increased gas costs have more to do with the fact that the entire gas supply from Russia is decreasing, partly because European countries want to move away from Russian gas, and partly because Russia is demanding payments in Rubles. The developments surrounding GasTerra and Gazprom are therefore part of a wider trend that is happening, and that brings along a lot of uncertainty. And that uncertainty about future gas deliveries can already be felt in the price. Directly in the gas price, as well as indirectly in the prices of goods. If the situation in Ukraine escalates further, with all the associated consequences for the Russian gas deliveries to Europe, the gas price can increase even more.  But it is also possible that Gazprom will discontinue even more deliveries, but that there is a price decrease after all. Simply because the current price already accounts for a negative future scenario.”

 

Gas supply
So the relatively high price we currently pay for gas is partly because the future uncertainty is already included in the price. What is striking is that the Dutch gas reserves are filled less than 40 percent. The government wants to replenish this to 70 percent, but the Mijnraad advises to do this to 100 percent. According to Van Eijkelenburg it is indeed wise to replenish the Dutch gas reserves as much as possible in the coming months before winter starts. “You have to take into account the worst possible scenario where more Russian gas supplies to Europe are discontinued in the short term and that we will have a cold winter. If you have the option now to best prepare yourself for this, you should do that. Europe will only import less Russian gas in the coming years, so the extra natural gas that was purchased will come in handy.”

We should regard Gazprom’s discontinued gas delivery to GasTerra as a small step in the larger movement to move away from Russian gas. “By definition, such a sudden boycott is a disruptive process and will never be gradual. Because of this, the predictability of supply and demand will decrease, and the prices will increase because of the increased uncertainty. But the delivery of gas to consumers will not be compromised, partly because of the increased expansion of the Dutch capacity to import liquid natural gas.”

 

Volgende publicatie:
How does the more expensive dollar affect Dutch consumers?

How does the more expensive dollar affect Dutch consumers?

Published on: 25 May 2022

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert provides a clear answer to the question of the week. This time: Thijs Knaap, chief economist at APG, talks about the consequences of the strong dollar for Dutch consumers.

At the start of 2021, one euro would fetch 1.22 dollars. At the beginning of this year, it was still 1.14 dollars and now the exchange rate of the euro has fallen to around 1.07. This means the euro is still worth a little more than the U.S. currency, but the difference is pretty small. Just after the introduction of the euro, at the beginning of this century, was the last time that the dollar was stronger than the European currency. At that time, you’d get a paltry 83 cents for your euro. Around the credit crisis of 2008, however, the euro was very strong again and was worth 1.60 dollars. So, the exchange rate fluctuates considerably. What factors play a role in this? And what does the Dutch consumer notice about the more expensive dollar?

More expensive vacations

With an exchange rate, three things come into play, Knaap explains. “Dutch consumers immediately experience the first one. That is because American products that you have to pay for in dollars, for example on the internet, become more expensive. Vacations to America also become pricier.” In addition, there is an indirect consequence. “Very generally, you can say that there are two large economic blocs that compete in the world market: America and Europe. Our power as Europe to buy products such as gasoline on the world market at a competitive price, for example, depends very much on what the euro is worth against the dollar. Now that the euro is weaker, we have to bid against the stronger dollar on the world market. That leads to products currently becoming more expensive for us than for Americans.”

 

The second force that plays a role in the exchange rate is the financial markets. “There is always a need to put excess money away somewhere in the world, for example in a bank or by buying a government bond. Then it matters what the interest rate is, and it is now quite high in America and quite low in Europe. So, it is more attractive to put money away in America, which increases the demand for dollars and makes that currency more expensive. The current high interest rate in the US is therefore the biggest reason for the strong dollar. Because although the global flows of goods are big, the financial flows are even bigger. These therefore have the greatest impact on the dollar exchange rate. If the European Central Bank were to raise interest rates now, the euro would become somewhat stronger, but that does not have a one-to-one effect. Financial markets also take into account expectations about the U.S. and European economies. The European economy is somewhat weaker, for example due to the war in Ukraine. The rise in US interest rates will therefore be stronger than in the eurozone.”  

Next year the dollar may even be stronger than it is now

Safe haven

The fact that the dollar is still seen as a safe haven is the third factor influencing the exchange rate. “Anytime there is a calamity somewhere in the world, like right now the war in Ukraine, investors get scared and take their money to the U.S. and buy dollars. They do so because they have learned through trial and error that at the time of misfortune, the dollar rises in value. There is some debate as to whether the US really is that safe for investors anymore. Think of the period under President Trump, for example. But for now, Washington has nothing to worry about. Just look at the beginning of this year: Russia invades a country and boom, all the money goes to the US.”

 

There is also a reason to be happy with a cheap currency. After all, European products are now cheaper on the world market and will therefore be sold more, which in turn can lead to more employment, for example. In that sense, Europeans can benefit indirectly from a cheap European currency. This also applies to the Netherlands, although additional employment can currently also lead to a further tightening of the labor market. “Despite the fact that a large part of our exports remain within the euro zone, trade with non-euro countries still plays a major role in the Dutch economy. A cheap euro is therefore not only good for exports of German and French cars or Italian fashion, but also for Dutch exporters.”

 

Long term

So, possibly extra jobs for the Netherlands, but also more expensive American products and vacations. Those prices will only go down again when the exchange rate of the euro rises. What is needed for that? “In the short term, a higher interest rate,” Knaap says. “In the long run, it will work itself out: the cheaper euro will lead to so much trade that demand for euros will increase and demand for dollars will decrease. An end to the war in Ukraine will also make for a stronger euro.” For now, the U.S. currency will remain strong, Knaap expects. “In the US, they’re really raising interest rates, which will further shore up the dollar. I would venture to say that the dollar will be a lot weaker in five years, but next year it may well be stronger than it is now.” So, for the time being, American products and vacations will remain relatively expensive for Dutch consumers.

Volgende publicatie:
Are We Right to Be Scared of a Recession?

Are We Right to Be Scared of a Recession?

Published on: 12 May 2022

Current topics with regard to the economy, investment (responsible investment in particular), pensions, and income: Every week, an expert at APG provides a clear answer to the “Question of the week”. This time, macroeconomist and senior strategist Charles Kalshoven explains whether we’re right to be scared of a recession.

 

Although the economy rapidly recovered immediately after the pandemic, the current outlook for the global economy is worsening once again. The war in Ukraine and a new wave of COVID-19 in China, which has caused another partial lockdown of the country’s economy, are weighing on growth. Disrupted supply chains for energy and machine parts—or fears of disruption—are further pushing up prices. And inflation was sky-high even before all this. Central banks are now fast-tracking measures and, one after the other, raising interest rates. But won’t that put us into recession? Is the fear of a period of economic downturn—with the risk of more bankruptcies, higher unemployment, and falling tax revenues—the reason for the current stock market plunge?

 

Investors
“Almost every recession is preceded by a bad stock market performance. But this doesn’t work in reverse. Not every bear market, meaning a 20% decline in stock prices, is followed by a recession. It’s often a false alarm,” argues Kalshoven. “If you look at companies’ recent profit figures, they’re reasonably as expected. It’s also not the case that analysts have become more negative about next year’s profits. So, these factors don’t necessarily point towards a recession. Interest rates are the more likely cause of falling stock market prices. When interest rates rise, the present value of future profits falls. This in turn translates into lower stock market prices. A degree of uncertainty plays a role in this value, such as how exactly the tightening of monetary policy will affect the economy. Will we manage to contain inflation without causing excessive collateral damage to growth? The Bank of England, for example, has already warned that the British economy will enter recession later this year.”

A normal recession is needed to ‘cleanse’ the economy of excesses, but that’s not the case now

Economic Shock
“There are enough other sources of uncertainty, whether about the developments themselves—the war in Ukraine or fresh lockdowns in fall—or their impact. The past years have been so eventful that we can’t really know for sure whether historic relations are still relevant. We’re coming out of the pandemic, which delivered an unparalleled economic shock. The response from central banks and governments, pulling out all the stops to bear the brunt of the impact, was unprecedented. The end of the pandemic led to a sudden recovery in demand. The pandemic had also caused gaps in the labor market, with people quitting their jobs en masse, leading to the current staff shortages. That’s another economic shock we’re having to deal with. And here, in the West, we’ve identified new Omicron variants from South Africa. Although these variants appear to be milder than previous ones, there are still many uncertainties. Predicting the future has always been a tricky business; that applies now more than ever. So, it’s hard to say whether there will be a recession.”

 

Excesses
Until recently, all economic indicators were positive. Does this mean that the consequences of a possible recession might not be so bad? “It won’t be a textbook recession, which is a result of economic overheating. A period of optimism eventually leads to excessive credit growth, which destabilizes house prices and stock market prices. If wages and prices grow too rapidly, central banks intervene by raising interest rates. But this isn’t a classic case of excesses. The pandemic meant consumers were unable to spend their money and instead accumulated a large stock of savings. There was also a huge degree of government support that kept companies afloat. And while the current mass staff shortages are driving up wages, the cause lies elsewhere. The pandemic shut down entire sectors of the economy, causing staff to get up and leave. A sudden swing in demand, from zero to full throttle, will doubtless create problems. The situation will resolve itself, possibly through higher wages, but that doesn’t mean it’s a classic wage-price spiral. A normal recession is needed to ‘cleanse’ the economy of excesses, but that’s not the case now. With that in mind, I don’t expect a drawn-out, exasperating recession—if there even is one.”

Volgende publicatie:
Thijs Knaap at BNR about a changing economic regime

Thijs Knaap at BNR about a changing economic regime

Published on: 11 May 2022

“Right now there is an economic regime change going on.” That is what APG's Thijs Knaap says in the business program Zakendoen on BNR Nieuwsradio, in response to the falling share prices of so-called 'corona winners' such as streaming services, meal deliverers and now also postal and parcel deliverer PostNL. “A company that does well in one economic regime, does poorly in another. That's not so strange. The question that you then have as an investor is whether all companies are doing badly. How is the average? And to my great relief I can see that the average is actually going quite well.”

Knaap, chief economist at APG, regularly joins the investor panel of Zakendoen. In Tuesday's broadcast, he also discusses the continuing turmoil in the financial markets as a result of the Federal Reserve's rate hike. “The Fed and the other central banks now have only one goal and that is to stop inflation as quickly as possible. So the rescue for the stock market is not going to come from them.” Meanwhile, gloomy clouds are looming on the economic horizon, in the form of the ongoing war in Ukraine and lockdowns in China. “That could just lead to things slowing down quite quickly, and then there is the risk that the central banks that are slowing down the economy will do so in a situation where the economy itself is actually slowing down.” With the danger that the economy will be slowed down too much. “And when that happens you have a recession and investors don't like that at all,” said Knaap in conversation with presenter Thomas van Zijl and Martijn Rozemuller, Head of Europe at VanEck.

Listen to the entire broadcast (Dutch) here.

Volgende publicatie:
What causes the rise in the coverage ratio?

What causes the rise in the coverage ratio?

Published on: 20 April 2022

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Chief Economist Thijs Knaap talks about the pension funds’ rising coverage ratios.

Many pension funds had good news on Thursday: their coverage ratio - which reflects the financial position of a fund - has risen in the past quarter. The actuarial interest rate is used to determine whether a fund’s current assets are sufficient to pay out pensions (the so-called liabilities) (in the future). The higher the interest rate, the less capital a fund needs to have and the higher the coverage ratio. It’s like saving for a vacation: the higher the interest, the less you have to put aside each month. Based on the coverage ratio, a pension fund decides whether to increase pensions. This is therefore an important percentage.

Returns
“It’s a bad economic time,” Knaap says. “There is a war in Ukraine, and there is a scarcity of personnel and goods because the economy suddenly started to run at full speed after Covid. On top of that, China is in lockdown after the last Covid outbreak there. This creates additional scarcity. The fact that the economy took a hit due to these factors is also reflected in pension fund returns for the past quarter. For example, the bond and share portfolios showed losses of around 5 to 6 percent. You don’t want to have quarters like that too often. In the past, there were quarters in which shares fell by 20 percent, but then you often had bonds that actually increased in value.”


Now the value of all investments is falling, with the exception of so-called alternatives such as commodities, private equity and infrastructure. “But you can’t make it with just good returns on those. Many funds are having negative returns and that has repercussions for their assets: they are falling. But the funny thing is that the coverage ratio is not only based on the assets of a pension fund, but also on the liabilities. This amount is calculated using interest rates and these are now rising so quickly that money is growing faster and less needs to be put aside by the funds to pay pensions. In other words, the liabilities are falling, so the coverage ratio is rising and has even reached a level that we haven’t seen in some funds since 2008, just before the credit crisis. What is going on with the funding ratio right now is quite curious: negative returns but a higher funding ratio. That’s exactly the opposite from the one we saw over the past decade. In those years, pension funds achieved excellent returns but their funding ratios fell. However high the returns were, the liabilities rose even more sharply as a result of the falling interest rates.”

It is still far too early to say that we have definitively reached the end of the ever-decreasing interest rate

Interest
The current higher funding ratios are due to increased interest rates. That raises the question of how long interest rates will remain high. "Since the 1980s, the credibility of central banks and their policies to curb inflation have become increasingly reliable. Now inflation is rising and the European Central Bank is still not doing anything, so there is a chance that the credibility of central banks will decline again. That could mean permanently higher interest rates because investors want to be compensated for the risk if inflation peaks again in the future."


However, there are also reasons to believe that interest rates will eventually fall again. “Right now, there is a lot of savings, both in the West among baby boomers, for example, and in emerging economies like China.” That pushes down interest rates, and the factors underlying the surplus of (savings) money still exist. “Although you can point to a few that are turning around a bit, such as low inflation expectations. Another one is the Chinese supply shock. Items from China, like TVs and cell phones kept getting cheaper and cheaper. Since Covid, the West has wanted to become less dependent on Chinese production. This could lead to less import of cheap products from China. Low-wage countries also want to earn more from their products, which therefore become more expensive. Moreover, China will also want to start spending more. The same can be said of the Western baby boomers, who are now retired. The supply and demand for money will then come more into balance, which could possibly reverse the trend of falling interest rates. But in my view, it is still far too early to say that we have definitively reached the end of the ever-decreasing interest rate.”

Volgende publicatie:
Can housing be made affordable again?

Can housing be made affordable again?

Published on: 14 April 2022

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Head of European real estate Robert-Jan Foortse talks about the question of whether housing can be made affordable again.

New homes threaten to become unaffordable for many people, warns the Home Owners Association (VEH) on Monday. The same day, the government says it wants to do something about the steep rise in rents in the free sector. The question arises whether housing can be made affordable again, and how. According to Foortse, there is only one solution, and that is to build more homes. A lot of homes. 

Rental Rates
“I think the solution is a bigger housing supply. Other measures may be counterproductive. One example of a counterproductive measure is limiting rent increases. After all, if rents are no longer allowed to rise, why would investors invest in Dutch homes? One consequence may be that large investors invest their capital in the housing market of the countries around us, where often the same problems apply as in the Netherlands. After all, part of the problem is partly the result of the monetary and fiscal policy pursued in recent years.”

When it comes to rental housing, corporations also play a role. “They could divest part of their rental housing in the free sector to institutional investors in order to focus entirely on social rental housing.” Foortse does not think that will send rental rates in the free sector through the roof. “Institutional investors generally invest in residential properties because they have a fairly low investment risk and are therefore a stable part of their portfolio. Residential investments have a somewhat lower return but if the rent increases are around the inflation level, I think it works well for investors. For this year, the largest Dutch investors, in consultation with IVBN and the Ministry of the Interior, have decided to limit the rent increase to 3.3%, despite higher inflation. A limited rent increase reduces competition because it makes private equity firms, which want to increase rent as much as possible in a short period of time, lose interest. Thus, you reduce the stress on the market and prices do not go through the roof. Long-term investors benefit most from a stable, predictable housing market.”

Investors are also looking at accessibility for housing in the large cities for workers such as teachers and medical staff

New buildings
The Dutch housing market now consists of 57 percent owner-occupied housing and 43 percent rental housing. Investments for new rental homes will have to come partly from investors, but the money for owner-occupied homes will have to be raised by private buyers. “Newly built homes are now in the 300 to 500,000s, but that is a price that few people can afford anymore, according to VEH. The question is how to build houses in the 200 to 250,000 range. They will either be much smaller than the current new construction, or they will be in places that are less desirable,” Foortse says. There are two major components in the price structure of a house that make it difficult to build much cheaper. “There are the construction and material costs, which are rising by the day due to high inflation, and there is the price of the site. That is often calculated by municipalities. It is difficult for them to offer the site cheaper, because then they are left with a hole in their budget and can no longer finance other projects.”


Last month, Housing Minister Hugo de Jonge did indicate that he can intervene with a so-called “designation” with local authorities to enable additional residential construction. To date, such a designation has rarely been used, and not without reason, Foortse believes. “That is considered a draconian measure in the Netherlands, because you touch the hierarchy that we have in this country with a national, provincial and municipal government. I understand that the cabinet wants to coordinate the solution to this problem centrally, but I can also understand if there is local resistance to new constructions projects here and there.


Finally, according to Foortse, the construction of new homes is not only hindered by the sharp increase in land and material costs, but also by the strict(er) laws and regulations regarding sustainability. Examples are regulations on insulation, on the disconnection of gas networks and on emissions of CO2 and nitrogen. "This limits the possibilities to designate new housing locations and often leads to higher construction costs. Institutional investors also have the task of investing heavily to make the existing housing portfolios more sustainable. The latter does contribute to lower energy costs for tenants."

Upgrading
There are several sides to the concept of affordability, Foortse explains. “For example, you can ask yourself for whom new construction should be affordable. If new houses are built for around 450,000, we can at least ensure that anyone currently living in a house valued at 200-300,000 could upgrade to a new house. This will create more supply in the lower segment for first-time buyers. In recent years, the supply in the 450,000-range lagged behind, which prevented people from advancing in the housing market. After all, if there are no better-quality new homes, why move? Traditionally, a person moves from a single to a double household and eventually to a family home. People generally look for more space in their next home.”


Building more is thus the long-term solution. There are, however, a number of concerns that Foortse believes should be taken into account. One is to ensure that the government does not scare off large investors by limiting rent increases. As far as new construction is concerned, consideration must be given to whom it is being built for: for those moving up to the higher segment or for first-time buyers. And in the case of new construction, it will be a balancing act for the government to remove any local resistance to new construction projects. "In the shorter term, we can investigate whether we could make better use of the existing housing stock, as was recently suggested by some economists. This could be done by further stimulating cohabitation, or at least not making it more financially unattractive. The number of single-person households has been rising for years. For the affordability of the housing market, it would be good if that trend could be stopped. In addition to affordability, institutional investors are also looking at accessibility for housing in the large(r) cities for so-called 'key workers', such as teachers and medical staff. This can be done by introducing priority arrangements."

Volgende publicatie:
What if the EU starts boycotting oil and gas from Russia?

What if the EU starts boycotting oil and gas from Russia?

Published on: 7 April 2022

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Peter Verbaken, Head of APG's Commodities Team, talks about the consequences of a boycott of Russian energy.

 

A gas and oil boycott is not part of the latest sanctions package against Russia, but it is a measure the EU is holding in reserve. According to a report by the Netherlands Bureau for Economic Policy Analysis, the Netherlands will be hit hard if Brussels imposes such a ban. Should we therefore be afraid of such a boycott? Or will the consequences not be as bad as expected, as professor of economics Sweder van Wijnbergen argues in de Volkskrant?

First of all, Verbaken says that the situation in Ukraine affects him. “It is terrible to see how the people of Ukraine are suffering from the violence of war and how the country seems to be slowly being devastated. I've been following it closely from the start, also partly because of the impact it has on my work, and I sincerely hope it ends soon."

Coal as an alternative
Because of Europe’s heavy dependence on Russian gas, a gas boycott will hit harder than an oil boycott, Verbaken argues. “In the Netherlands, we have been lucky with a mild winter. At the end of last year, even before the Russian invasion of Ukraine, there was already a huge increase in the price of gas because stocks were so low. The mild winter and an increase in Russian gas supplies enabled us to get through the winter. But now we need to replenish gas supplies in the summer. If a ban on Russian gas imports does not allow us to replenish stocks in time, an alternative plan will be needed. Van Wijnbergen mentions the use of coal as a solution. In theory, that is indeed possible, although it is, of course, contrary to current climate policy. But it cannot be ruled out that politicians might nevertheless decide to switch from gas to coal in this exceptional situation.”


The question is whether coal can make up for the loss of Russian gas. Verbaken does not think so. “In practice it will turn out that you also have to do something on the demand side. For example, there is already a government campaign called ‘Turn the Switch’, which aims to get households to turn the thermostat a degree lower. However, a third of the gas demand in the Netherlands comes from industry. In order to reduce this demand, it cannot be ruled out that large industrial gas consumers will be forced to use less gas. This is certainly conceivable if Dutch gas reserves are not to be topped up with Russian gas this summer. However, forcing industry to use less gas is a radical measure of the kind we haven't seen since the 1970s, with the oil crisis and car-free Sundays.”



The concerns about the impact of a boycott of Russian gas and oil are certainly justified

Oil shortage
In the case of oil, it is a slightly different story. Should the EU no longer import oil from Russia, then China and India will buy up the Russian oil at steep discounts, Van Wijnbergen expects. As a result, both Asian powers will need to import less non-Russian oil from the world market and therefore there will be no oil shortage. In theory, Van Wijnbergen has a point, but in practice things may turn out more difficult, Verbaken believes. “It will certainly take Europe several months to switch from Russia to other oil suppliers. In addition, the West is putting pressure on China and India not to play Russia’s savior, especially after the latest news about the many civilian deaths in Ukraine. What also comes into play are the so-called letters of credit, the financing required to ship oil. Financial parties will be very cautious about issuing them due to the threat of sanctions and public opinion.” It therefore seems unlikely in the short term that an oil shortage can be avoided by China and India importing more Russian oil, leaving more non-Russian oil for the EU countries.    

 

Major interventions
Verbaken thinks that Van Wijnbergen’s view is a bit on the optimistic side when it comes to the consequences of the removal of Russian energy. “Among other things, he is missing the factors that make shifting oil flows complex, and that gas demand really needs to come down.” Most problematic remains the boycott of gas. “The elimination of Russian gas punches a hole in our supply. If it can't be replenished in the summer, the problem will become more and more critical,” Verbaken says. “It’s like driving towards a cliff. The gas supply can only be sufficiently replenished if sufficient coal-fired power stations can be started up, the demand for gas can be reduced, and the supply of LNG (liquefied natural gas) can be tapped here and there. At the moment all that is being asked of the population is to use gas more sparingly, but what if that proves insufficient? How far do you have to go to force industries to use less gas? And which industries do you start with? The crux of this situation is that the government cannot explain to the population that they will not be able to heat their homes next winter. Major interventions are needed to prevent that from happening. The concerns about the impact of a boycott of Russian gas and oil are therefore certainly justified as far as I am concerned. However, given the current situation, with all the suffering that Moscow causes, it would be a perfectly justifiable sanction against Russia. If it is actually implemented, the government, industry and the Dutch population will have to work hard together to minimize its impact on us.”   

Volgende publicatie:
Is the Dutch shopping street making a comeback?

Is the Dutch shopping street making a comeback?

Published on: 30 March 2022

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Head of European real estate Robert-Jan Foortse, about the future of the Dutch shopping street. “In the past, people mainly went there to buy things. Today, consumers want more.”

In the first year after opening, the Mall of the Netherlands, a shopping center in Leidschendam-Voorburg, attracted 13 million visitors, despite two lockdowns. That was more than expected. This tells us that big shopping malls seem to be faring well, but the Dutch shopping street, on the other hand, is struggling, and has been for some time, Foortse says. “Although it does make a difference whether you are talking about the Kalverstraat in Amsterdam or a shopping street in the somewhat smaller provincial town. The trend from physical to digital sales has been going on for a number of years, and Covid has accelerated that trend.” Still, Foortse sees opportunities for the shopping street, although it will require a transformation.

Fragmented

Investing in shopping streets to help them get back on their feet is not so easy. “The problem with shopping streets is that ownership is extremely fragmented. It is therefore very difficult to create a proposition for a shopping street because there are so many stakeholders and owners. For example, one owner may want to invest in his own property but not in the infrastructure, while another may not want to invest at all. Because of this fragmentation, APG, about fifteen years ago, chose to invest primarily in shopping malls and outlets, such as, for example, Batavia Stad Fashion Outlet. This is actually a replica of a Dutch shopping street. Because we have full ownership, this shopping street can be managed and controlled in the same way as a shopping mall. We have influence on the range of stores, the parking facilities and whether it is safe and well maintained. We don’t have that influence in an ordinary shopping street. Visitors in Batavia Stad notice that it is a pleasant environment for shopping, although the outlet discounts also play a role, of course.” 

 

Because the traditional shopping street has so many stakeholders with different interests, it takes a long time to find a new use for it, says Foortse. “This is primarily a problem that, in my opinion, lends itself to a public-private partnership. The various stakeholders must come together and design a joint vision of the shopping street of the future.” Because the function is changing. “In the past, people used to go there mainly to buy things. Today, consumers want more. I think people still want to go to the shopping street, but it’s more to buy something tasty from the deli or to visit a pop-up store. You have to create something that appeals to people, and that is no longer just offering items to buy. Experience may be a word that is being overused, but it really is about that. Post-Covid, we are once again noticing that people are social beings after all and like to go somewhere where there are other people.”

A transformation of the shopping street is afoot, but it is happening slowly

Transformation

Of all purchases, about 75 percent are still made in physical stores. The remaining 25 percent is done digitally; a percentage that will only get higher. The average shopping street of the near future will therefore need fewer square meters of retail space. “The shopping street still has quite a few qualities to offer, but we may have to reinvent it and find a new approach. One of those qualities is that they are often centrally located in a town. Also, there is often parking nearby. If flexible working becomes a permanent part of our lives, retail space can be converted into workplaces. People who don’t have a suitable workspace at home will then be able to go there, but they will still not want to have to deal with traffic jams to the office outside the city.” The location in the city center and the parking facilities also argue in favor of converting stores into homes, Foortse believes. “But it can easily take several years to get the zoning changed. That does take away the incentive to create something new in a shopping street. That’s where I see a role for politicians. They should ensure that this process can be accelerated.”  

 

It appears that the Dutch shopping street will be able to make a new start, but it will look very different in ten or twenty years than it does today, Foortse believes. “I think you’ll see much more of a mix of today’s traditional stores, places to eat and drink, offices where you can rent workplaces and residential spaces. That will be true for all cities, although there will be differences in emphasis. For example, Amsterdam’s Kalverstraat will remain primarily a shopping street while the shopping street in a smaller town will include more housing. A transformation of the shopping street is afoot, but it is happening slowly.”

Volgende publicatie:
What happens when a country goes bankrupt?

What happens when a country goes bankrupt?

Published on: 25 March 2022

Topical issues in the field of economy, (responsible) investment, pension and income: every week, one of APG's experts provides a clear answer to this week's question.

 

In this edition: Sjacco Schouten, Head of Emerging Market Debt, about the consequences when a country such as Russia is no longer able to fulfil its payment obligations. “Also in an economic sense, it is a scenario with only losers.”

 

In the beginning of March, a number of credit rating agencies expressed the expectation that Russia would possibly no longer be able in the short term to fulfil its payment obligations (interest and redemption of the national debt) due to the Western sanctions. Russian government bonds were given a so-called ‘junk’ status, which more or less means that creditors deem it very likely that a large part of their money will not be repaid. This raises the question what happens to a country in case of such ‘bankruptcy’. In what case is this applicable? And what are the consequences?

 

The first question appears to be relatively easy to answer. Schouten: “The interest payment and redemption of government bonds usually takes place on pre-established dates. If a country misses such date, a grace period takes effect first during which the country is given the opportunity to still make the payment. When that doesn't happen, the country officially goes in default.

 

Virtually zero

The answer to the second question – about the consequences of such default – is much more complicated as it entails quite some ifs and buts.

 

“When a country is officially in default, all kinds of processes are activated. A government will usually propose a restructuring to the bondholders and make agreements on ‘how to continue’. These agreements depend on the conditions of the bond and the legislation of the country where the bonds are issued. In the most extreme case, when a country is truly unwilling or unable to pay, the bondholders are possibly forced to fully write off their bonds, to virtually zero. The price will not be entirely zero, because you can never rule out for a hundred percent that some money will still be repaid at a certain time.”

 

Russia has not yet achieved that point. The country has not missed any payments until now. Should that be the case in the future, it will rather be due to the sanctions making payment transactions impossible or Russia's willingness to pay than its ability to fulfil the financial obligations. “Given Russia's oil revenues, the country should be more than capable to fulfil its obligations. Whether the country is also willing to do so in the long term, is a different issue. In that respect, a distinction in conditions could arise between investors who are willing to participate in restructuring and bondholders who are unwilling or unable to do as a result of the sanctions. This provides Russia with the opportunity to give ‘friendly’ countries more favorable conditions than ‘unfriendly’ countries.”

 

Preferential treatment

However, the pari passu principle applies to bondholders, meaning they should be treated equally. Schouten: “In principle, bondholders from a certain country cannot be given a preferential treatment. But the conditions of bonds issued under local legislation may differ from the conditions of government bonds issued under international legislation. In addition to the legislative aspect, many other factors play a role in a possible restructuring of the Russian national debt. For example, the currency in which a bond is issued - dollars or rubles. Moreover, for certain investors it is simply forbidden to still receive payments from Russia or to make payments to Russian entities. All of those factors combined make restructuring very complicated when it comes to Russia.”

 

Consequences

What are the consequences should Russia decide to no longer pay its bondholders?

 

“In that case, the country would become even more isolated and restricted in gaining access to the capital markets. In the short-term Russia is able to absorb a lot through its oil reserves and proceeds from oil and gas supplies. In broad lines, the country is still able to keep its economy running reasonably well. But in the months to come, the Russian economy is expected to shrink and the financial situation of the country will become more problematic. To what extent the country will then be able to hold back the economic contraction depends on the willingness of other countries to help Russia. That willingness cannot be excluded. Even if all Western countries - such as the US - ban Russian oil, Russia can still sell oil to other countries.”

 

‘Adding insult to injury’

Nevertheless, it looks like Russia will be facing a doomsday scenario in an economic sense. “In terms of food, Russia should for a large part be able to continue to be self-sufficient. But once the supply of everything the country imports stops - technology, computers, chips, and so on – large parts of the economy will come to a standstill. The average Russian will go back in time. He or she may possibly overcome the fact that a visit to McDonald’s is no longer possible, but access to technological knowledge and certain parts for instance, is of great importance to keep an economy running and developing.”

 

Adding insult to injury, that's what it comes down to should Russia become a defaulter. Schouten: “The sanctions are already causing damage to the economy. The population already prefers having dollars instead of rubles. In the event of a default, a major cycle is triggered after which the Russian economy is expected to end up in a deep recession with high inflation. Also in an economic sense, it is a scenario with only losers.”

Volgende publicatie:
"With only shares and bonds you would now be at a loss"

"With only shares and bonds you would now be at a loss"

Published on: 22 March 2022

"It's a time of volatile markets, which means we do a lot of trades at APG. If only to balance the portfolio over and over again." That is what APG's Thijs Knaap says in the program Zakendoen on BNR Nieuwsradio in a conversation about investments. "I wanted to highlight a transaction that we did in the context of ANET, the ABP Dutch Energy Transition Fund." ANET has taken an interest in the Groningen company enie.nl, which sells and rents solar panels. "Anyone who can calculate knows that the electricity price has become much higher. As a result, the payback period has become much shorter. That has not escaped most people, so there is a lot of demand for solar panels. Enie.nl can now expand with the money they get from ANET. This is good for the returns and good for the energy transition."


Knaap, chief economist at APG, regularly joins the investor panel of Zakendoen. In today's broadcast, he also discusses how APG had for a number of years taken into account an economic shock in which prices of raw materials would rise rapidly and a subsequent growth shock due to economic uncertainty. "We had put in place an investment policy to prepare us for that shock, but for years it was only one percent inflation and commodity prices fell. So basically it was the reverse of such a shock for a long time. But due to the current high commodity prices and the inflation that is skyrocketing, what we have set up is now doing great. Examples are investments in commodities, hedge funds and infrastructure. While with a portfolio with only shares and bonds you would have certainly be at a loss," says Knaap in conversation with presenter Thomas van Zijl and panel member Mary Pieterse-Bloem.


Listen to the entire broadcast here.

 

Volgende publicatie:
How is the high price of natural gas going to affect the EU’s green ambitions?

How is the high price of natural gas going to affect the EU’s green ambitions?

Published on: 10 March 2022

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: equity investor Martijn Olthof talks about the consequences of the high price of natural gas for the EU’s green ambitions.

The increase in the price of natural gas, which started last fall, due to increasing demand from industry, has become much more critical because of the war in Ukraine. The war and the high price of natural gas are reasons for the EU to quickly become less dependent on natural gas from Russia. Brussels therefore announced on Tuesday that the EU is going to have to be able to manage without natural gas from Russia before 2030. This REPowerEU plan is a tightening of the so-called Green Deal and the Fit for 55 plan, which aims to reduce carbon emissions by 55 percent by 2030. An even more ambitious climate plan, therefore, and a turning point in European energy policy.

“The Fit for 55 plan was already very ambitious, especially in these times of high energy prices, high inflation and a shortage of labor and materials,” Olthof said. So, is an even tighter target realistic? “It is realistic in the sense that the need is there, and need supersedes law. Such a tightening is also necessary because Moscow can decide to turn off the natural gas tap at any moment. The situation in Ukraine and the high natural gas prices are all the more reason to implement the Green Deal and the Fit for 55 plan more quickly and to focus even more on renewable energy.”

Investments
One of the concrete measures in the REPowerEU plan is to shorten procedures for the construction of wind farms and solar panels. A welcome measure, according to OIthof. “But this will only succeed if the bureaucracy around permits is reduced, because companies that want to invest in this often run into that. If, for example, a high-voltage cable has to be laid, especially on land, it often takes years before all the required procedures have been completed. In and of itself this is a good thing, because people do need to have a say in the matter and not everyone wants a high-voltage pylon in their backyard. But one way or the other, this type of infrastructure is necessary, especially if we want to move away from fossil fuels, and particularly from natural gas from Russia, even sooner. It is therefore important that, where possible, without losing sight of the interests of local residents, procedures of this kind are actually relaxed so that investments in the energy transition can get off the ground more easily.”

Accelerating the green ambitions alone will not get Europe off Russian natural gas this year

The REPowerEU plan increases the likelihood that the European Commission will achieve its green ambitions. But accelerating green ambitions alone will not get Europe off Russian natural gas this year. “That really requires emergency measures, and certainly to keep energy bills somewhat affordable,” Olthof argues. “For example, the plan provides for the coordinated and mandatory rapid replenishment of stocks in natural gas storage facilities in Western Europe. There is also talk of temporarily re-regulating energy prices. Countries could pay for this by imposing additional taxes on high profits of some electricity companies that are not dependent on natural gas. And by using the high revenues from the sale of carbon emission rights.”

Coal
Another emergency measure could be to keep a coal plant open longer, even though the intention is to close it down as soon as possible, Olthof says. “After all, the targets for reducing carbon emissions have to be met one way or another. If in Europe, we were to keep the coal plants open a year longer, the extra emissions would have to be compensated for in some other way in order to keep global warming to a maximum of 1.5 degrees. And that was already an ambitious goal before the war in Ukraine. In addition, 46 percent of Europe’s coal imports also comes from Russia, so that may not reduce our dependence either. So, the REPower EU plan does not explicitly provide for keeping coal plants open longer, nor does it propose an easing of the issue of emission allowances. So, it seems that the European Commission at least wants to prevent the short-term emergency plan from jeopardizing the green ambitions, in order to, at the same time, push the realization of the ambitions closer in the longer term.”

In conclusion, Olthof sees the high price of natural gas as a clear incentive for Europe’s green ambitions. “The fact that this sharp rise in the price of natural gas is partly the result of our dependence on Russia, naturally increases the urgency of getting rid of fossil fuels immensely. And particularly from Russia. That urgency is very clear. In the short term, with fairly distributed burdens, so as to avoid problems if Moscow turns off the tap. But also in the longer term, so that we will never again have to depend on Russia for our energy.” 

Volgende publicatie:
ABP and bpfBouw sell all investments in Russia

ABP and bpfBouw sell all investments in Russia

Published on: 3 March 2022

Investments of both funds already amounted to less than 0.1 percent of total invested assets

ABP and bpfBouw, APG’s largest clients, have decided to sell all their Russian investments. This makes them the first Dutch pension funds to do so in response to Russia’s invasion of Ukraine.  Both funds expect the selling of the investments to take some time due to the complicated market conditions in Russia.

In total, ABP still invests about 520 million euros in Russia, and bpfBouw about 58 million euros. This amounts to less than 0.1 percent of the total invested capital. As of recent, both funds have been rapidly reducing their investments in Russia. For example, no investments have been made in Russian government bonds that are on our exclusion list due to a binding EU weapons embargo.

Shocked

“ABP is shocked by the Russian invasion of Ukraine and the violence it has brought about. Our sympathies go out to all the people in Ukraine. ABP has closely been following developments, which has now resulted in selling all our remaining investments in Russian companies,” the fund stated on its website. bpfBouw calls its decision one ‘made on principles’.

Stock exchange remains closed

It is no easy task to act swiftly and sell all investments immediately, as the Moscow stock exchange is still closed. Also, Russia does not accept sell orders from foreign investors. Both funds announce that APG will sell their investments as soon as this is deemed responsible.  They also emphasise that they are closely monitoring developments. This includes keeping an eye on the consequences of the sanctions package imposed on Russia.

First in the Netherlands

As previously stated, the two funds are the first in the Netherlands to sell their investments in response to the Russian invasion. Other countries, including Denmark, Switzerland and Belgium, preceded the Netherlands with similar actions.

Volgende publicatie:
Is stopping corona support such a good idea?

Is stopping corona support such a good idea?

Published on: 3 March 2022

Current issues in the fields of the economy, (responsible) investment, pension and income: every week, an APG expert provides a clear answer to the question of the week. This time: macro-economist and senior strategist Charles Kalshoven about the end of corona support and its consequences. Doesn't the end come too soon?

 

As of April 1, the government will stop offering corona support. This means employers can no longer make use of, among other things, the Emergency Bridging Measure for Employment and deferral of tax payments. Apparently, they are no longer needed. After all, entrepreneurs can now do business without restrictions thanks to the relaxation of the corona measures and the positive economic outlook, the government reports in a news item. Kalshoven also believes that the abolition of the support packages comes at a good time from an economic point of view, although the situation in Ukraine makes the prospects somewhat more uncertain. "When you walk through the city, you see 'people wanted' signs everywhere. So the economy is doing well, resulting in major shortages in the labor market."

 

Zombie companies
According to the economist, reversing a measure is always difficult but in this case, it is necessary. "They say there's no measure as permanent as a temporary measure. Think, for example, of the French toll roads or Kok's quarter: measures that ultimately turned out to be more permanent than temporary. Significant measures were needed in this case to prevent corona from hitting the economy significantly. But at some point, those measures must be reversed. For example, the Netherlands Bureau for Economic Policy Analysis argued about a year ago to stop the support because it would prevent the transition of the economy. Instead of letting employees of financially unhealthy companies sit at home paid, you want them to work in more promising sectors. The so-called zombie companies then go insolvent while their employees can be more productive elsewhere. That's how it works in a normal recession. But this recession was abnormal. And there has been no transition due to the support measures."

The number of corporate insolvencies is therefore still very low. "That is partly thanks to the corona support, which was aimed at all employers, financially healthy or not," says Kalshoven. "In a normal recession, insolvencies skyrocket. But this was more of a kind of artificial coma of the economy, in order to fight corona. A year ago, we were still afraid of a wave of insolvencies but fortunately, this hasn't happened so far. This may also have to do with the fact that people have been able to save for a long time and now like to spend that money, for example in the catering industry."

Investors consider the chance that a company will not be able to repay a loan is more likely than before

Back to normal
Even if the number of insolvencies is not rising yet, investors are now clearly taking this more into account. The interest on corporate loans is rising faster than the interest paid by creditworthy governments. The difference is the credit spread, which is growing. And you can partly see that spread as an insurance premium, in the event no repayment is made or is made too late. Investors demand a fee for this. The rising credit spread is a worldwide trend, Kalshoven points out. "It was very low, and is now rising to normal values again. This means investors consider the chance that a company will not be able to repay a loan is more likely than before, and therefore demand more interest on corporate bonds." That's a direct result of stopping corona support. The higher credit risk spread also has a monetary cause. "Central banks are withdrawing from the bond market and announcing rate hikes. Those are signs we're going back to normal."

Consumer confidence
Could the war in Ukraine still affect the positive economic outlook? "That's very difficult to predict. If Russia turns off the gas tap or we say we no longer want Russian gas, energy prices will rise further and the availability of gas will be jeopardized. This could have consequences for greenhouse horticulture and industry, for example. And also for consumer confidence. If gas and petrol remain expensive or even rise in price, we will be hit in our wallets. Perhaps there will be economic support again, this time in the form of a war package." 

If such a support package is needed again, due to the conflict in Ukraine or a new corona outbreak, it is fairly easy to set up such a package again. "The bottleneck isn't whether you can implement it quickly, but whether you as a government have the resources. In the Netherlands, the national debt has increased as a result of the corona support packages, but it's still not that bad. In other countries, the national debt is much higher. Although you may also wonder what is high in this case. What matters is whether the market thinks a country can repay its debt. When corona struck, the European Commission bought up debt securities from EU Member States. This created market confidence in European bonds and more unity in Europe. That unit seems to have grown even larger by the Russian invasion of Ukraine. As a result, I think that a lot is still possible in terms of European support measures, if that turns out to be necessary."

Volgende publicatie:
"What's important to us is that an employee gets insight into his financial situation"

"What's important to us is that an employee gets insight into his financial situation"

Published on: 2 March 2022

APG and Vattenfall have signed a contract under which the energy company can use Geldvinder for three years. Thanks to the digital platform, the 2400 employees of Vattenfall Netherlands can get started with their personal financial goals for now and in the future. Gertjan Meijer (HR Services Vattenfall) and Richard Coonen (COO Geldvinder) tell about the value of Geldvinder.

The goal of Geldvinder is that employees can work on their financial fitness in an accessible and proactive way. This means that they get insight into and control over their finances.  According to Meijer, this fits in nicely with the other tools that Vattenfall offers its employees. "We have a package of five products that allow our employees to work on their financial fitness. For example, there is the personnel fund, which can offer a loan to an employee in special cases. In addition, in collaboration with Nibud, we publish a newspaper about financial issues. For financial insights, an employee can already talk to an advisor of EBC Netherlands and for pension questions he or she can contact ABP. And as a final addition, there is now Geldvinder. That has been used for the past two years by our youth organization Megawatt. Partly thanks to their positive reactions, we decided to offer Geldvinder to our entire organization. The participants think it is a nice addition to our existing package and are pleased with the user-friendliness and convenience of the tool."

Vattenfall pays a considerable amount of attention to the financial situation of its employees. Is there a specific reason for this?
"No, but as an employer we think it is important to take good care of our employees. Part of this is to make financial problems a topic which can be discussed openly. In addition, as an energy company, we have to deal with customers who, for example, have difficulty paying their bills. We are in discussion with Nibud and municipalities, among others, about how we can prevent debt problems or notice them in time so that we can help. That contact with those customers also plays a role in the attention we have for financial fitness as an organization."

What purpose does Vattenfall has with Geldvinder?
"When people have financial problems, this can lead to sick leave or they might no longer function optimally. It is therefore important to make it a topic which can be discussed and to support employees in this as much as possible. We see Geldvinder primarily as a tool with which employees gain insight into their financial situation. For example, what their expenses are, and what is needed to save for certain purposes, such as a house, children or a wedding. That was still missing in the other products we offer. Momentarily, Geldvinder supports our people mainly digitally. In the long run, it will also be possible to accompany the digital support with actual conversations, but we do not yet know whether that adds anything to what we already offer."

An employer can do quite a lot to point out to his employees the importance of financial fitness.  But isn't it ultimately the responsibility of the employee himself?
"In the end, it is indeed. But as an employer you can act as a facilitator and we do that in this way. As Vattenfall, for example, we also pay a lot of attention to vitality. For example, employees can have a preventive health examination carried out or undertake activities aimed at fitness with a discount. Safety is also important in our company. You have to realize that not everyone has an office function at Vattenfall, there are also colleagues working in the power plants and at the wind farms. That work has risks that we handle carefully. As an employer, we continuously listen to our employees to find out what their needs are. Just like we do with customers. And it doesn't stop at the financial fitness or health of our employees. We for instance also promote what we call sustainable employability by offering our employees the opportunity to grow in our company."

Through Geldvinder, Vattenfall can keep an eye on the financial fitness of its employees. Are there no privacy concerns?
"It's anonymous.  And that's a good thing, because we don't want that information to come to us via Geldvinder. We have other ways to do this, such as a conversation between an employee and a manager. At Geldvinder, it's really about an employee gaining insight into his or her financial situation. With inflation making many products more expensive, Geldvinder can also help them with ways to save money. That is more important to us as an employer than that certain scores roll out and we do something with them."

Vattenfall is one of the 20 employers who helped APG set up the platform. Of those employers, 8 employers have now signed a contract, including the Vrije Universiteit and APG itself. APG is still talking with the rest of the partners about possible contracts. "As APG, we started Geldvinder two years ago because we wanted to promote people's financial fitness," says Richard Coonen (COO Geldvinder). "We think that's just as important as physical and mental fitness. APG and Vattenfall are on the same page in this respect. And just like APG, Vattenfall attaches great importance  to good employership and wants to support their employees in various ways based on social involvement. It is therefore nice to see that, as a large employer, they make Geldvinder available to their employees for at least three years."

Volgende publicatie:
“The blockchain has no help desk or insurance”

“The blockchain has no help desk or insurance”

Published on: 24 February 2022

Topical issues in the field of economy, (responsible) investment, pension and income: every week, one of APG's experts provides a clear answer to this week's question. In this edition: Portfolio Manager Jean-Paul Koopmans on the question whether non-fungible tokens (NFTs) are the future or are just a hype.

 

Paying 200K for a digital image of a monkey wearing a baseball cap and a slice of pizza in its mouth. That doesn't come as a surprise anymore to anyone involved in the world of the non-fungible tokens. In this case, the digital ownership of the image also provides access to an exclusive virtual club: the Bored Ape Yacht Club. The monkey images belong to the most expensive NFTs of the moment, in a market where a value of 44 billion dollars was traded last year. The trade in objects that only exist digitally. In short: a non-fungible token is a digital ownership certificate of an object or event. This certificate is registered in the blockchain: an enormous database distributed globally across many computers. Such token can be bought using ethereum or any other cryptocurrency on a digital marketplace, like OpenSea.

The value of an NFT is determined by the application it offers, Koopmans explains. Think about access to a virtual club or a digital piece of clothing or attribute you can use for a digital avatar in a computer game. If an NFT is not offering a specific application? “The only purpose in that case only really is to show off being the rightful owner or resell it on a trade platform.” The possibility to buy or sell it through the blockchain is something the NFT has in common with a cryptocurrency. But the comparison should stop there. A cryptocurrency first of all is a payment instrument to pay for digital transactions, for example, while an NFT is a unique registration of a good.

 

Speculative
“NFTs are mined. During that process, people are in the race to obtain a virtual good, such as an image of a monkey,” says Koopmans. “In the case of the Bored Ape Yacht Club, 10,000 different images were involved. These images all had unique characteristics and the rarer the characteristic, the more popular the image. But it is totally arbitrarily whether you receive an image that appears to be popular or not. And that is exactly the major disadvantage of the trade in NFTs: it is highly speculative and therefore extremely difficult to attach a value to it. This is the difference with asset management where we utilize calculations showing the approximate worth of a company. Those methods are widely accepted. Every NFT is unique, on the other hand, meaning you just have to guess how much such image is or can become worth. New collections of these tokens are constantly issued and 99 percent thereof is worthless. That is why I absolutely consider this a hype. The same as baseball cards and stamps were a hype once.”

However, Koopmans sees a real future for the NFTs. “The activities of a notary in the Netherlands can be fully digitalized in a blockchain. The title deed of an apartment will in that case become an NFT. That can have major consequences for home ownership. It is difficult to divide a title deed into multiple smaller deeds at the moment going to a notary. An NFT makes it easy to split a house, for instance, among multiple owners. The monthly rental income is then distributed amongst them through the blockchain. That saves on notary costs and makes it possible to make very illiquid assets liquid. A house of 500K, for example, can be distributed among 100 NFTs with a value of 5000 euros each. To me, that would be a great, neat application of NFTs. But for the time being, an NFT has no judicial base and the notary's signature does.”

 

Blockchain
However, the question is whether trading an NFT is safe. “If a name or address on the title deed is incorrect, you can call the notary who can very easily correct the mistake. But the blockchain has no help desk or insurance. That means if you accidentally sent the NFT of your expensive image of a monkey to the wrong digital wallet, you lost it. A mistake is severely punished. And that's not just theoretical. A few days ago OpenSea was confronted with a hack, making it possible to send the monkey images from one account to another by means of a phishing mail. Even OpenSea is unable to reverse that because everything on the blockchain is immutable or unchangeable. In other words: the technology is robust but there's no room for error on the side of the user. Blockchain can however be considered as more open.” That open nature lies in the fact that NFTs can be traded day and night, and that there are no rules yet restricting the trade.

The lack of a judicial base and the safety risks are what stops an institutional investor, such as APG, from investing in NFTs. “Before authorization is given by De Nederlandsche Bank or the Netherlands Authority for the Financial Markets to invest in such instruments, quite a few hoops still have to be jumped through,” says Koopmans. “In order to make it widely applicable, a lot of research still has to be conducted. We are clearly in an experimental phase right now. The progress may be accelerated once the digital euro is introduced. It also stands or falls with the question whether or not it is backed by a community. But that community will only arise if NFTs can be applied in a practical way. I am an investor myself, so an application to me would be the development of cash flow from such digital ownership. This means, for example, music samples or news photos of which the NFTs can be traded.”

 

Van Gogh
Something similar is already happening in the world of digital art that clearly takes the lead when it comes to digital ownership. “It opens many opportunities for artists to gain more grip on what is happening to their creations, as an NFT allows for a transaction to return a part of the selling price to the artist. When Van Gogh sold a piece of art, he would only receive an amount once and some name recognition at best. NFT makes it possible for an artist to earn, for instance, 5 percent of the transaction amount each time, thus leading to cash flow from art. The same applies if you sell the digital ownership to a song. Everyone using the song has to pay a certain amount that ends up with the owner of the song and the artist. That's how you can exclude record companies.”

 

Volgende publicatie:
Can we expect a Great Resignation in the Netherlands as well?

Can we expect a Great Resignation in the Netherlands as well?

Published on: 17 February 2022

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Chief Economist Thijs Knaap and Head of Policy Peter Gortzak on the question of whether there will also be a Great Resignation in the Netherlands. “People in America are more sensitive to economic stimuli.”

The Great Resignation is the term coined in the United States to describe a recent trend in the labor market: millions of Americans (there were 47 million last year, 10 million more than in 2020) are resigning. They are generally not doing this so they can sit on the couch at home and do nothing, but because they can get a job elsewhere with better working conditions. Can we expect the same wave of resignations in the Netherlands?

Terms of employment
Gortzak and Knaap see little reason for that at this time. And there are two main reasons for this. First, Gortzak mentions that the United States has a completely different labor market than the Netherlands, which has stricter regulation through collective bargaining agreements, among other things. “Those collective agreements prevent poor working conditions. What also differs from America is that the Dutch government prevented a lot of misery with its support packages, ensuring that employees had no reason to resign. Some economists do think that those support packages were too hefty here, keeping some companies alive artificially. They may have a point, but because of that there was no reason for workers here to resign en masse, as they did in America.”

 

Like Gortzak, Knaap sees collective bargaining agreements as a major cause that there is less movement in the labor market here than in the United States. There, companies often don’t have a collective agreement, and terminating an employment contract is easier. This leads to dynamism: companies are more likely to lay off, and employees are more likely to look at opportunities elsewhere. “For the service sector, which is big in the Netherlands and regulated by collective agreements, this is often more difficult. A factor like a wage increase therefore affects the labor market sooner in America than in the Netherlands. What you do see here is that, for example, healthcare personnel leave salaried employment and become self-employed for more money. In the Netherlands too, there are ways of negotiating better employment conditions outside of the collective bargaining agreement.”

Bitter fruits
There was some movement in the healthcare sector, as well as in the Dutch hospitality and events industry. “There they are now reaping the bitter fruits of having been closed down by Covid for a long time,” Gortzak states. “Many people who worked in those sectors on temporary or zero-hours contracts found themselves out on the street. Many of them subsequently chose to work at the Covid test stations. That is really different from America, where people start looking for a new, better job while they’re still at an existing job. Because in the Netherlands it only involves specific sectors, you can at most speak of a Resignation, not a Great Resignation.”

In the Netherlands, people are less quick to move, but the pressure on the labor market does exist here too

According to Knaap, the shift in the American labor market is also related to the retirement wave in that country. “In America, people were laid off and given a check by the government, whereas in Europe the companies were kept afloat by the government. The Americans who got such a check just before retirement didn’t go back to apply for jobs. They disappeared from the labor market, creating jobs. In Europe, everyone with a permanent contract stayed employed because they continued to be paid anyway.” That’s another reason there hasn’t been a wave of resignations here. “Because why would you quit if you are still getting your wages? It’s also much easier to fire employees in America. We’ve all seen the image of the American leaving the office with a box in his hands. People there are also more sensitive to economic stimuli. Americans are willing to change jobs for just a small difference in pay. This creates scarcity and then, before you know it, there is a Great Resignation. In the Netherlands, people are less quick to move, but the pressure on the labor market does exist here too.”

More people working more
This pressure, incidentally, is a fairly recent phenomenon. In the 1970s and 1980s, there was a surplus of labor and not enough jobs could be created to put all the unemployed to work. “Now we’re in a reverse situation,” says Knaap. “The baby boomers are retiring and continuing to spend money, so more labor is needed. At the same time, the influx from below, for example through labor migration, is not large enough. Labor market participation has increased dramatically over the past 20 years, in part because older workers are now working until they get their state pension and are no longer taking early retirement. The data therefore does not support the image of a Great Resignation. If anything, it’s the opposite: more people are going to be working more.”

 

Yet employers are struggling to fill their vacancies. According to Knaap, this has four consequences. “There is more labor migration heading towards our country. Consider the English-speaking lady who speaks to you in the coffee shop. Secondly, it leads to higher wages, at least at the companies that can afford it. The companies that are not able to don’t make it or at least, they can’t grow. And third, it encourages automation. For example, if a restaurant can’t find staff to take the orders, they’ll put a QR code on the table so the customers can order from their phones. A fourth consequence may be that the government comes up with measures to increase the participation of women in the labor market, such as more affordable childcare.”

Volgende publicatie:
APG urges Korean companies to take strong climate action

APG urges Korean companies to take strong climate action

Published on: 16 February 2022

In a letter to CEOs and chairs, APG is calling on large South Korean companies and major carbon emitters to step up their efforts to combat climate change. On behalf of its pension fund clients, APG urges ambitious climate and carbon reduction strategies and commitments.

 

The letter has been sent to ten large South Korean companies in which APG invests, including Samsung Electronics, Hyundai Steel and LG Chem, a large (petro)chemical company. Despite being large carbon emitters, none of these companies is in scope of Climate Action 100+. This investor-led initiative aims to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.

 

‘Demonstrate ambition and leadership’

“Climate change is the single biggest challenge the world is facing,” says Yoo-Kyung (YK) Park, Head of Responsible Investment & Governance Asia Pacific. “These companies are important to the Korean economy and the global supply chain. Transforming them into low carbon businesses is critical to the goal of climate crisis mitigation.”

 

APG calls on the selected companies to evaluate their existing climate change strategies and carbon reduction targets and make sure these are ‘sufficiently ambitious’. The companies are also urged to communicate on their challenges related to climate change and the energy transition with long-term investors and to take their suggestions into careful consideration. The letter states it is important for companies to demonstrate ‘consistent and decisive leadership’ in addressing climate change.

 

Focus on bulk users of fossil fuels

APG’s largest client ABP announced in October 2021 it will stop investing in fossil fuel producers. The civil service pension fund wants to focus its engagement efforts on bulk users of fossil fuels, such as utility companies and car manufacturers. APG’s engagement with these ten large Korean companies – none of which is a fossil fuel producer - fits in with this approach.

Volgende publicatie:
"We are now in a situation where we have to deal with scarcity"

"We are now in a situation where we have to deal with scarcity"

Published on: 15 February 2022

"The landscape for investors is really changing." That is what APG's Thijs Knaap says in the program Zakendoen on BNR Nieuwsradio in a conversation about the policy options of central banks. "We are now in a situation where you have to deal with scarcity: raw materials such as oil are scarce, labour and also capital. And that's where the central banks come in. There was always plenty of money, but if the central banks start tightening, money becomes scarcer and governments have to pay for bonds. These can then become a serious alternative to other investments."

Knaap, chief economist at APG, regularly joins the Zakendoen investor panel. In today's broadcast, he also discusses the consequences of rising interest rates for pension funds. "It's bittersweet. The rising interest rate is good for the funding ratio of the funds, but at the same time, as a pension administrator, we also have a lot in the portfolio that becomes worth less. But if you look ahead, higher interest rates just mean you can earn more in the financial markets, so I'll look at that. It is also a better time to be an investor than it was a few years ago," says Knaap in conversation with presenter Thomas van Zijl and panel member Simon van Veen.

 

Listen to the entire broadcast (Dutch) here.

Volgende publicatie:
APG announces investment into Taronga Ventures’ built environment technology Fund

APG announces investment into Taronga Ventures’ built environment technology Fund

Published on: 10 February 2022

APG, on behalf of its pension fund clients, has made it’s first investment into the built environment technology (“Proptech”) in Asia Pacific through an investment in a Taronga Ventures built environment technology fund.  The technologies aim to improve ESG, operation efficiency and quality of the real estate. The fund’s strong focus on ESG related-tech also perfectly aligns with APG’s vision to drive longer term sustainability within real estate.

 

Click here for pressrelease

Volgende publicatie:
What are the economic consequences of an armed conflict in Ukraine?

What are the economic consequences of an armed conflict in Ukraine?

Published on: 27 January 2022

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: macroeconomist and senior strategist Charles Kalshoven on the possible economic consequences of an armed conflict in Ukraine. “An investor should not be scared off too quickly by geopolitical risks.”

 

With the amassing of more than a hundred thousand Russian military troops at the Ukraine border, and the response of the U.S. and NATO, tensions have now risen high. It looks like a Russian invasion, followed by an armed conflict may be imminent. The threat is not without repercussions on financial markets. The gains that the AEX recorded in the past six months (about 12 percent) have now completely evaporated - although concerns about the omicron variant of Covid, high inflation and expected interest rate hikes by the U.S. central bank also played an important role. Russian shares lost as much as a third of their value during this period.

 

Supply Shock
When it comes to the possible economic consequences of a conflict in Ukraine, you cannot ignore Europe’s dependence on Russian gas. Kalshoven: “Our dependence on Russia is very high in that respect (35% of European consumption concerns Russian gas, ed.). If an actual military conflict in Ukraine leads to Putin turning off the gas tap, this will probably mean a sharp rise in the price of gas and electricity. It would be a supply shock, which could lead to a decline in purchasing power and economic stagnation. Because, if there is a shortage of gas, our government would rather shut down factories than literally leave households out in the cold.”

Such a combination of stagnant growth and high inflation doesn’t usually work out well for equities, Kalshoven says. “And the uncertainty that accompanies an actual conflict doesn’t help either. But perhaps there would be one stroke of luck: oil prices don’t have to follow gas prices. When economies slow down a notch, that pushes the price of oil down. As a result, inflation may not be as bad in the end. It is true that Russia is also a major oil producer and can therefore also influence the price by turning off the oil tap just like the gas tap. But waging war is expensive. The question is therefore whether the country can manage without the income from oil in addition to a loss of income from gas.”

The threat of a Russian gas shutdown may also bring an advantage

Don’t run away
From an investment perspective, Kalshoven sees the situation in Ukraine as a realistic threat. But he adds that an investor should not be too easily put off by such geopolitical risks. “We are seeing movements in financial markets that can be attributed to the threat in Ukraine. And of course, as an investor, you can think about all kinds of consequences if tensions are rising somewhere. But it certainly doesn’t necessarily mean that you should just run away from the risks by selling everything. Antti Ilmanen, an investment expert, compares it to participating in a lottery: it could pay off, but usually it doesn’t. Research shows that it usually pays for investors to stay put, because there are plenty of returns against the risks, and geopolitical tensions usually get resolved.”

Moreover, it is always good for an investor to diversify, including with regard to the risks of geopolitical tensions, the economist says. “If there is unrest in Ukraine, it does not necessarily mean that somewhere else in the world things will immediately get out of hand. Of course, all the attention of the international community is focused on this conflict. That could provide an opportunity for countries elsewhere to take controversial steps that suit them.”

 

Profitable sooner
That threat of a gas supply cutoff by Russia could also bring a benefit. “It makes Europe face up to its dependence on Russia for its energy supply. This makes the importance of the energy transition even clearer. In any case, if you don’t want to be dependent on Russia, you will have to think seriously about accelerating the alternatives. The energy shortage that will arise if Russia’s gas supplies are cut off cannot entirely be solved immediately by means of solar and wind energy.”

For investments in renewable energy, Kalshoven says, a cutoff of Russian gas supplies is likely to mean they would benefit.  “When energy prices rise, sustainable energy projects become profitable sooner. On the other hand, of course, investments in companies or projects that consume a lot of energy suffer.”

    

Volgende publicatie:
“Whether things are going to go left or right, it’s going to be suspenseful”

“Whether things are going to go left or right, it’s going to be suspenseful”

Published on: 25 January 2022

What economic developments will we see this year? And what characterized the economy last year? Thijs Knaap, Chief Economist at APG, is keeping a close eye this year on central bank policies and on the political and economic developments in China.

 

As the hot topic of both last year and this year, Knaap still wants to have mentioned Covid. “It was simply the driving force behind a great many things in 2021, positive and negative. Lockdowns, the variants popping up everywhere, vaccines, government support measures, working from home, growing inequality and the dissatisfaction with this.” He is therefore curious what the impact of the omicron variant will be. “If we're lucky, the consequences will be limited to mandatory working from home and bankruptcies of cruise lines and corporate air travel providers. If we are unlucky, then we are on the eve of a long lockdown and the question of what all needs to close down to prevent the new variant from causing a lot of casualties again,” Knaap states.

 

Big companies
Knaap still marvels at the high earnings growth of companies in the MSCI World Global Index. “Those profits increased by 70% last year. The big companies that are in such an index, despite corona, are doing great. That’s really an unexpected turn of events that’s working out well for investors. It’s an important development, though, because if the big companies weren’t doing well, the economic concerns would be a lot bigger than they are now.”

 

Sherlock Holmes

What Knaap sees as characteristic for 2021, in addition to the profitability of the large companies, is that all hell has not broken loose, although there was every possibility for that to happen. “There is a Sherlock Holmes story in which he solves a crime thanks to a dog that did not bark when it was supposed to. The storming of the Capitol, the tensions in Ukraine, government debts jumping by dozens of percent; all events that everyone said would have enormous economic consequences but ended up only causing a ripple. Maybe that’s because everyone is preoccupied with Covid, but it’s striking.”  

 

The question of what China will do is becoming an increasingly important factor

Central banks
Knaap sees central bank policy as a major theme of 2022. “Only when the broad monetary policy is reversed will you find out who can’t manage without that financial support. That’s what we’re going to find out this year. You also never know how fast it’s going to go, that’s the critical thing about monetary policy. For example, they can raise interest rates twice without consequences. Then they do it for a third time and all of a sudden everything crashes. So, whether things are going to go left or right, it's going to be suspenseful.”

 

China

In this new year, Knaap is also keeping a close eye on China. “The question of what that country will do is becoming an increasingly important factor. At least that’s what we’re all saying, but we’re not really taking it into account yet. That’s partly because China has always been so incredibly reliable when it comes to economic growth. Always, when the world economy was doing badly, the Chinese started spending more money, acting as an anchor for the world economy. Now China has reversed its traditional policy and is no longer investing itself out of a period of lower economic growth. Indeed, Beijing is now shortchanging large companies like property developers and Internet companies. Then again, it’s a special year for China. Not just because next month is the Winter Olympics, where all sorts of political mishaps can happen, but especially because Xi Jinping’s term in office expires in October. He will probably stay anyway, but it is a tense moment in which the economy has to be in good shape. And in the background is the story of big companies like Evergrande; we don't know if they will go down, whether they are supported or not. That uncertainty around China is definitely going to play a role in the global economy this year.”

Volgende publicatie:
How is the Netherlands affected by China’s faltering economy?

How is the Netherlands affected by China’s faltering economy?

Published on: 20 January 2022

Current issues related to the economy, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Chief Economist Thijs Knaap on the faltering Chinese economy. “The decline in growth had to happen sometime.”

 

Economic growth of 4 percent in the fourth quarter of 2021. Many a country would sign up for it. For China, which announced the figure on Monday, it is nothing short of a setback. In fact, it is one of the lowest growth rates since 1990. Now that China’s impressive economic growth seems to have come to a temporary halt, the question looms: how will we be affected? 

 

An event in the Chinese economy can affect other countries in three ways, Knaap says. Through the trade in goods and services, through financial channels and through the price of raw materials. Trade in goods and services, the trade channel, revolves mainly around Chinese exports, and to a (much) lesser extent imports. From the pen you write with to the phone you make calls with: chances are it comes from China. “It’s a bit of a Dutch instinct to immediately think of trade. But the interesting thing is that in the case of China this instinct is correct,” Knaap says. “Because of these three ways, the trade channel with China does have the greatest impact on the Netherlands.” This was noticeable when the Netherlands needed masks at the beginning of the Covid pandemic and China could not immediately supply them. Knaap does not expect the reduced Chinese growth rate to have an immediate major impact on trade with the Netherlands. At most, the delivery time of, for example, phones will be a bit longer.

 

Trade
It might be thought that the trade channel is also the most important in the Netherlands’ economic relations with many other countries, but Knaap says that is not the case. “The best example of this is the United States, with which the Netherlands also does a lot of trade. When the financial markets collapsed there in 2008, things went seriously wrong here too, and banks like Fortis and ABN AMRO ran into major problems. Suddenly the financial channel appeared to have the greatest influence. The recession in the Netherlands was not caused by a drop in demand for Dutch products from the United States, but by exposure to the American financial system. This applies to virtually every major economy with which the Netherlands trades, but not to China. This is because for a long time Beijing wanted as few financial ties with foreign countries as possible. As a result, foreign influence is limited and China has little exposure to the international financial system. As a result, a slowdown in Chinese growth is much less serious for an open economy like the Netherlands than if things go wrong on Wall Street.”

The country cannot continue to grow at a rate of 10 percent every year for the rest of the century

Financial ties
Thus, financial ties between China and the rest of the world are relatively small, although foreign money is increasingly entering China. In 2018, for example, only 8.5 percent of China’s stock markets were foreign-owned. By the third quarter of 2021, that had grown to 10.5 percent. “For APG and other investors, the influence of the Chinese market has increased somewhat in recent years, but it is still not a lot,” Knaap said. This is also reflected in the 2021 figures. “That was a really good year, with equity returns of up to 30 percent in the developed markets. If you look at the emerging markets, including China, the returns were very modest, around 5 percent. That is not great for us as investors, but it is not a disaster because China only occupies a modest place in our portfolio. Then you can see on a small scale what is true for the world at large. If the market in China performs a little less well, the entire world economy will not immediately come to a standstill.”

 

Then there is the price of raw materials. “When China is growing very fast, there is a big demand for oil, iron and cement and you notice that they are getting more expensive. That was very significant at times; in the late 1990s and early this century. At the time, the price of oil was running very high because the world was not used to this sharply increased demand from China. This is currently the case and Beijing’s influence on the price of raw materials is a lot less now.”

 

Consequences
Knaap doesn’t think it’s surprising that China’s growth rates are declining a bit now. “That had to happen sometime. The country cannot continue to grow at a rate of 10 percent every year for the rest of the century.” Due to the limited exposure to the global financial system, the slight hiccup in the Chinese economy does not have to have an immediate impact on the Dutch economy either. In the event of hiccups in production and transport, there is a chance that China will no longer be able to deliver all products on time, which consumers and businesses here would notice. “More interesting is the question whether economic growth will slow down further,” says Knaap. “A really stagnant economy is difficult to adjust at a certain point. Then it remains to be seen how the Chinese population reacts and what impact that would have on the position of Xi Jinping and the Communist Party. The story is that those in power in China rule by the grace of high economic growth. What will happen in a serious recession is difficult to predict. But we are far from there, with 4 percent economic growth. Moreover, the Chinese are very good at managing this kind of economic risk.”

 

Volgende publicatie:
Knowing what you will get

Knowing what you will get

Published on: 16 December 2021

Whether it is during Sinterklaas or Christmas, December is the month of gifts to many. You usually don't know what you will be getting. And that brings me to the question: what exactly is the value of surprises? Is it better to know more?

 

Economists tend to refer to the ‘welfare loss’ of giving gifts during this month. This loss arises when gifts don't match the preferences of the person on the receiving end. Should you have given money, he or she would have been able to buy something more to their liking. Which means that person would have been better off. Thirty years ago an economist figured out that up to one third of all the billions of euros spent on Christmas presents is actually wasted money.

 

It's an information problem as we are unable to look into each other's heads. We succeed slightly better for some people. We know, for example, that gifts to our other halves limit the welfare loss up to 10 percent.

 

Incomplete information can actually be rewarding when it comes to investing. Just think about it. With a government bond issued by a creditworthy country you have all the information. The certainty of the promised cashflows until the date of maturity is quite large. But the expected return is low. When it comes to shares, the term is in principle indefinite and both dividends and the price movements are uncertain. On average you will be rewarded in the long-term. Exactly by not knowing what you will get, you may earn a risk premium.

 

More information isn't always better. Investors in an index tracker - but also pension participants - will in many cases not open their ‘package’. The objective for them is to have a well-diversified portfolio. It's not about the exact percentage of shares in Ahold, Apple or Alphabet they have in their basket.

 

More information is often convenient. But an advantage sometimes brings along its ugly brother. Imagine your doctor having a test able to predict your date of death with great certainty. That is of course super handy if you are accruing pension under own management. You will then know exactly how much money you have to set aside for how long. This means you never pay too much. Yet, I suspect such test will not become very popular. It is, so to say, rather unsociably.

 

Back to that welfare loss. If everyone would buy his or her own gifts, it's a super-efficient economist solution. But the same applies here: it is not very sociable. Maybe more difficult to express in terms of money, but the surprise itself is worth something too. And the emphasis of the relationship between the giver and the receiver.

Knowing what you will get, just isn't what happens in life. Like John Lennon sang to his son Sean: ‘Life is what happens to you while you’re busy making other plans’.

And as we have now entered the atmosphere of the music top 2000, we can also quote the Stones: ‘You can’t always get what you want. But if you try sometime you'll find you get what you need’.

 

Charles Kalshoven is macroeconomist and senior strategist at APG

Volgende publicatie:
Will the economic outlook change, now that Covid appears to be here to stay?

Will the economic outlook change, now that Covid appears to be here to stay?

Published on: 3 December 2021

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Chief economist Thijs Knaap on whether the economic outlook should be adjusted now that it seems that Covid will be with us for the foreseeable future.

 

Just under two years after the Covid outbreak, the Netherlands is again in lockdown due to increasing infection rates. At the same time, reports are coming in from southern Africa of a new Covid variant. At the end of 2020, we still thought that vaccines would get the virus under control, but now that hope seems to have faded. How will the new developments around Covid affect government policy, consumer confidence and financial markets? "If the government decides to stop the support, it really becomes a less positive story and an economic blow with bankruptcies and rising unemployment is inevitable," said Knaap.

 

Impact

When Covid first took hold, the Netherlands benefited greatly from the support measures of the Dutch government. Central banks also took action, so the impact on companies and financial markets was lower than expected. In fact, the number of bankruptcies is historically low to this day. Investors did not lose their money because companies were able to survive thanks to the support. Knaap: "Government support measures make sense in a temporary crisis, as Covid was considered to be, until recently. But understandably, there will come a point where the government may think, 'enough is enough'. After all, you can't keep companies afloat until the end of the century if their existence is no longer feasible in the new situation." So, for the economic outlook, a lot depends on what the Dutch government and other countries decide in the coming period.

 

The longer the lockdown remains in place, the worse it is for economic dynamism. "At the end of the day, you need people to engage in business. But who is going to open a restaurant in this day and age? The economy is getting a hit regardless. That also argues in favor of not phasing out the support measures, so that at least the existing companies don't go bankrupt," says Knaap. The advantage for the Netherlands is that it still gets money when it issues bonds. "We can continue to do that for years to come without being affected," he says. For other countries, and certainly emerging economies, the situation is more dire.

 

Consumers

Consumer confidence also plays a role in the economic outlook. "Economic growth occurs when companies make a profit, and they do that when they sell enough of their products to consumers. This has been difficult in the recent period due to problems with product supply. However, there was a lot of demand for products and services recently because consumers hoarded money during Covid by not being able to go to the pub or go on vacation," Knaap said. "The new lockdown still constitutes another setback for many people, with the hairdresser and theaters having to close earlier. That leads to less consumer confidence, making consumers more cautious in their spending. And that's never good for the economy."

 

Shock

The news of the omicron variant had already led to falling stock prices. What does that say about the prospects for the stock market? "Investors always have the previous shock still in their minds," states Knaap. That was in March 2020. But after first going down sharply, stock markets rose to record highs. It is possible that investors expect that the new outbreak will not lead to an economic crisis. Still, Knaap takes into account that it will turn out differently than last time. "The falling prices could now persist for a longer time, because we no longer see Covid as something temporary." Should we therefore adjust economic expectations? "The storyline is changing now. The previous storyline started with the pandemic after which the vaccinations followed and we expected economic recovery with rapid growth within two years." With these latest developments, that chance of rapid recovery now suddenly seems a lot further away."

 

The next few weeks will show whether this is a last hiccup of the virus and this will be a short lockdown. If so, there is a good chance that the positive economic expectations of a few weeks ago can be sustained. This is also due to the fact that the government can still intervene for a long time and stock prices have not fallen extraordinarily hard after the emergence of the omicron variant. Still, the new lockdown is creating uncertainty, including among consumers. The longer Covid remains among us, the more likely it is that at some point the government will stop its generous support policy, causing bankruptcies and unemployment to rise and stock markets to take a hit as well. The story is not over yet.

Volgende publicatie:
“Is the end of the trade conflict between Europe and the US good for the economy?”

“Is the end of the trade conflict between Europe and the US good for the economy?”

Published on: 4 November 2021

Current issues related to economics, (responsible) investment, pensions and income: every week, an APG expert provides a clear answer to the question of the week. This time: chief economist Thijs Knaap on what the end of the year-long trade dispute between the US and the EU means for our economy.  “It is a step in the right direction but the bigger picture around trade is globally negative.”


The trade war unleashed by US President Trump partly ended on 31 October 2021 - the fight with China is still in full swing, but on the US-European front tempers have calmed somewhat.  The conflict began on 1 June 2018 with the introduction of import tariffs by the US - 25 percent on steel and 10 percent on aluminum from the European Union, among others. The EU did not let that move go unanswered and raised import tariffs on a large number of US products from 5 percent to 31 percent. In addition to steel and aluminum, this also included products like motorcycles, cranberry juice, whisky, shoes and clothing.


With the suspension of these EU tariffs (which, additionally, were to be doubled on 1 December 2021) and the removal of a substantial portion of the US import duties on European steel, the hatchet seems to have been buried. How will we notice this in our economy?


Dirty steel

Knaap: “An economist is not happy about import tariffs, because they protect a country's industries artificially, which leads to inefficiency. If a country with a certain industry cannot compete in the world market on its own, it is better to import those products from countries that can make them cheaper. Economically, it is always better if everyone focuses on what they do best. In this respect, the recent agreement between the US and the EU is good news. At the same time, it is only a step in the right direction. Because the bigger global trend is that continents are actually sealing off their markets.”


And according to Knaap, it is not like all trade barriers between the US and Europe have disappeared. “The Harley-riding bourbon drinker can breathe a sigh of relief, because the import duties on it will disappear completely. But the Americans are more reticent when it comes to steel: the import duty will only disappear for a certain quantity of steel. Moreover, the US and the EU have indicated that they no longer want ‘dirty steel’. That may have to do with the environment - steel from China has a bigger ecological footprint - but they seem to be doing it mainly to protect Western producers from cheaper Chinese steel.”

 

Confrontation with vulnerabilities

Knaap is referring to the agreement that steel must be produced entirely in the EU/US trading bloc in order to qualify for duty-free status. This should prevent Chinese steel from undergoing the final minimal processing in Europe before being exported to the US.

 

“Protecting the Western world” seems to be related more to a strategic pursuit of independence than to protecting jobs. Knaap: “During the pandemic, countries were confronted with their vulnerabilities. Masks, for example, had to come from China, it was difficult to get respirators, and so on. People reconsidered whether they wanted to be dependent on others for such strategic products. Steel is a particularly strategic product, especially in military terms. China, too, aspires to this independence - as do Europe and the USA - and wants to be able to manufacture aircraft, cars, microchips, etc. itself. In any case, this will not lead to the protection of national jobs - one of Trump's political promises before the introduction of import duties on steel. Employment in the US steel industry first saw a modest upturn from 82,000 to 88,000 during the Trump administration, but then fell again and is now back to 82,000. Moreover, in the 1980s, it still employed 200,000 people. And this decrease has everything to do with increasing productivity per employee through automation. That effect is much stronger than that of an import tariff.”   


The real problem

The geopolitical factor, then, is where - from an economic point of view - the real problem for the global economy lies. “It is becoming more and more important. There is less and less understanding of globalization and trade in goods. Globalization is also less and less popular with politicians. As an economist I prefer to see it differently. It is certainly a sign of the times that we’re going to put more and more partitions between different parts of the world. So yes, the effect of ending the US-European trade conflict on the economy is positive, but limited. The larger trend shows declining economic globalization. That’s always inefficient and inconvenient. It’s at the expense of jobs and it will have a negative effect on global trade.” 

Volgende publicatie:
“What are the chances of ‘Glasgow’ producing concrete results?”

“What are the chances of ‘Glasgow’ producing concrete results?”

Published on: 28 October 2021

Current topics with regard to the economy, investment (responsible investment in particular), pensions, and income: Every week, an expert at APG provides a clear answer to the “Question of the week”. This week: Joost Slabbekoorn (Senior Responsible Investment & Governance Manager) examines the probability of the Glasgow Climate Summit producing concrete results. “Financial support of developing countries will be one of the most hotly disputed items.”

 

On the eve of the Glasgow conference, news items are following one another at a hitherto unprecedented pace. If one thing has become clear from this cascade of reports, it is this: We are not in good shape. The countries participating in the Paris Climate Conference in 2015 had agreed that the global temperature should not rise by more than 2 degrees by 2100, and ideally by no more than 1.5 degrees. If we continue at our current pace, we will reach that 1.5-degree rise as early as in 2030. The UN’s UNEP environmental program warned that the 2.7-degree mark will even be in sight by 2100 if we do nothing.

 

First Step

There is plenty of work to be done. However, the question is: Who will be taking the first step? “Historically speaking, responsibility for CO2 emissions lies primarily with Western countries. Nevertheless, countries such as China and India, above all, are currently registering a rapid increase in CO2 emissions. These countries cannot develop in the same fossil fuel-driven way as Western countries did in the past. They are simply too big for that. However, the rapid increase in CO2 emissions in those countries can also be attributed to the relocation of European steelworks to China!”

 

Countries such as India and China are able to partially shore up their development with renewable energy. Western countries at the Paris conference pledged 100 billion euros per year in climate development aid to support them in this. That promise has, however, not yet been kept. Slabbekoorn explains, “Chances are that this will also be one of the most hotly debated topics in Glasgow. Developing countries want rich countries to provide them with financial support in order to restore confidence. The ‘trade’ in targets between countries will be another topic of discussion. In this scenario, rich countries contribute to the reduction of CO2 in developing countries, because it is cheaper and easier to reduce these emissions there than on their own territory. Unambiguous rules are needed to facilitate this trade and to be able to verify it.”

 

Priorities

Slabbekoorn can identify a number of points on which action is needed. “One of the most important priorities is to phase out the use of coal for the production of electricity. Coal produces quite a lot of CO2, even though a good alternative is available: green electricity. Deforestation is another source of huge CO2 emissions. A third priority is to set a realistic price on CO2 and to stop funding the fossil fuel industry. It is remarkable that people in the Netherlands are currently provided government support to pay their energy bills. This is understandable, given the current situation, but it does mean that the government is indirectly funding fossil energy. Rising energy prices are also making many countries reluctant to accelerate the termination of coal use. And combating deforestation requires the support of Brazil. Unfortunately, Brazil currently has a president who is a champion of the logging sector. In short, things are not looking good in Glasgow when it comes to these three priorities.”

 

With the current gloomy outlook, it is inevitable that some measures will be impacting the lives of consumers. Slabbekoorn explains, “It is imperative that consumers are inconvenienced; otherwise, they will not change their behavior. And the sooner the transition to a more sustainable world is initiated, the less money and effort it will cost. Ultimately, this will also be more pleasant for the consumer. If we don’t take action now, we will have to intervene much more strongly later on. Then the break with our current way of life will be a lot more dramatic, through significantly higher costs for governments and consumers, for example.”

 

Reluctance

If the outcome of summit produces few or even no results, further global warming appears to be inevitable. “But there are many more roads leading to Paris,” Slabbekoorn argues. “If it nevertheless turns out that no agreement will be reached in Glasgow, this does not have to mean that remaining within the aforementioned 1.5-degree limit is impossible. A much stricter policy on energy and sustainability will therefore need to be imposed in the coming years. And the question is whether such policies will indeed be taken into effect, considering that countries are showing quite a bit of reluctance when it comes to adopting overly strict measures. In the meantime, we are already noticing the physical effects of higher temperatures.

 

It is ultimately up to the countries participating in the climate summit in Glasgow to incorporate possible agreements into their legislation. The Paris climate agreement is legally binding, but there is no international instrument to enforce it. “Once these agreements are embedded in national legislation, a country can be held to them by the courts. We saw this in the Netherlands in regard of the case brought by Urgenda against the Dutch government. Diplomatic contacts are very important during a summit like this. Still, this brings us back to the first point, which is who will be taking the first step. It doesn't look as if ‘Glasgow’ will produce any concrete results, but you can never predict what will happen at a summit like this. So, I’m keeping my fingers crossed,” says Slabbekoorn.

Volgende publicatie:
“Policymakers appear capable of steering away from disaster”

“Policymakers appear capable of steering away from disaster”

Published on: 21 October 2021

On October 21st, the largest pension funds of the Netherlands look back on the financial results of the third quarter. An appropriate moment to address some key questions. Is the value growth of APG’s clients’ portfolios during the pandemic likely to continue? Are bonds still attractive to an institutional investor? And if so, why? What are the implications of Covid for office space and the urban real estate market? And why is APG, as a believer in active investing, moving into index investing? APG’s Chief Investment Officer Peter Branner looks ahead and shares his vision on the basis of four statements.

 

It’s All Over Now? Last year we have had a bad economy and really great realized returns. Are those returns ‘borrowed from the future’? (Or is the story that Covid has been a support for the economy in the longer term?)


"The value of our clients’ portfolios fell after Covid hit, and instantly began recovery when governments and central banks started to support the market and the economy with fiscal as well as monetary stimulus. Before the end of 2020 the value of the portfolios was higher than before the pandemic. There are four reasons for this: the interest rates were lower, government support kept the economy going, the vaccine race provided strong hopes of a way out of the crisis, and APG happened to own, on balance, more of the securities that benefited from the pandemic and the economic support (and other events that took place during the year), than the market.


If there will be a time to “pay back” we don’t know. What we do know is that central banks and governments will dial back support, which will put pressure on asset prices. On the other hand, investors may be willing to continue to pay higher prices for risky assets, because they have learnt that policymakers are capable to steer away from disaster. Besides, the economy may start a new growth trajectory, driven by investments in clean energy and supported by new ways of working and collaborating. Markets will find a balance between these opposite vectors."

 

Bond Theme. ‘The future of bonds ain’t what it used to be’. The trend of declining interest rates is unlikely to continue and may even reverse. That makes bonds a lot less attractive from a return viewpoint.

 

"The interest we get on a bond is negative, so we pay money to own them. One main reason we would continue to hold them is the possibility that the interest goes even more negative, increasing the value of the bonds we have. And this has indeed been the case on average over the last 20 years. Shorter term, this would happen in a financial crisis, or when central banks go on lowering interest rates to achieve their inflation goals. Yet we already saw that in the 2020 covid crisis and the interest rate did not fall by that much, so owning bonds did not help our clients as much as they used to.


The silver lining here is that the current value of our clients’ liabilities, the pensions to be paid out in the future, behave like a bond.  So if bonds are a less attractive asset to own, this also means that liabilities are not as risky to have taken on. This has been and still is the main argument for owning bonds for pension funds."

 

I’m A Loser. The Dutch architect Rem Koolhaas is on record saying ‘Nowadays, city dwellers are losers’. Does Covid imply bad news for office space and urban real estate?


"The affordability of urban housing is under huge pressure. This is partly demand driven: people flock to cities for the economic, social, educational and cultural opportunities cities offer (including the presence of exciting architecture from Koolhaas and his peers). Covid has helped change the way people meet, socialize, work and collaborate. It is not yet clear, how this impacts the amount of floor space an office worker need, hence it is not a given that this will decline. What is clear is that the requirements for offices become harder to meet. Offices still need to be easy to reach by public and private means of transportation, become more resource-efficient and have excellent and robust technological infrastructure. Inner city development, concentrated around public transport hubs, remains one of the most sustainable ways of providing society with ways to interact."    

 

Play With Fire. Meme stocks, bitcoin, etc. - markets seem like a game these days. Flows seem more important than fundamentals. Does not sound like efficient markets. So why is APG moving into index investing?  


"Active investing means choosing what securities and assets to buy in a certain market, instead of just buying the market index exactly. To do that, our investment managers need to figure out what the value of the assets in a market could be, and pick the most attractive. This costs money, so active management needs to deliver more return than the costs. It costs time, because it may take a while before those attractive investments indeed bring in more money than the index. And it takes a bit of luck, because the assessment may be wrong. It is a bit similar to a sports game: even the best trained team, with the most skillful coaches and players, will not start scoring in the first minute and will not win every game. But it has a good chance of ending up in the top of the table at the end of a long season.


APG knows how to do active management, and is convinced it can add value, but we have to acknowledge that, based on cost and risk considerations, not all clients want to take an active approach in all markets they invest in. And given our size, APG is able to help those clients as well with our innovative responsible index solutions."

Volgende publicatie:
"Is the fear of the inflation specter justified?"

"Is the fear of the inflation specter justified?"

Published on: 21 October 2021

Current issues in the fields of the economy, (responsible) investment, pension and income: every week, an APG expert provides a clear answer to the question of the week. This time: Senior Strategist Frank van Weegberg on whether the increased inflation is short-term or not. "Globalization has pushed prices down for decades."


Now that the inflation rate in Europe has risen to 3% and in the United States to 5%, the key question is: is it a one to two-year 'peak' or 'shock', or will inflation last longer and thus erode purchasing power? There is a good chance that it is the former, says Van Weegberg. "Current inflation consists mainly of two effects. One is caused by production, logistics and supply issues. The other effect is due to the sharp rise in gas prices. We believe that both effects are temporary. And so the current inflation is probably also transient."


The first effect (the production, logistics and supply issues) occurred worldwide as a result of the corona pandemic. Van Weegberg: "For example, the scarcity of computer chips, the consequences of which have affected many industries. But a lot was also stuck in the Suez Canal, as a result of the blockade by container ship Ever Given in March. All this has led to increased prices for many products. But at some point, when the last aftermath of those problems has subsided and supplies have recovered, those prices will fall again."   


Shale gas

The second effect - increased oil and gas prices - is not expected to last long, according to the Senior Strategist. "The main causes are also temporary in nature: problems with gas production in Norway, a low supply of wind energy due to an unusually quiet period and the lack of approval for the Nord Stream 2 gas pipeline. Such price increases are sudden effects that also disappear, partly because, for example, the supply of shale gas increases. That is relatively laborious to produce, but with a high oil and gas price, it becomes profitable again."


And increasing Covid-19 infections in the winter period? Can they still throw a spanner in the works? "New lockdowns could put pressure on the supply of products again, which could lead to a new inflation peak. Even then, the effect on inflation is not structural. This can also be deduced from the expectations of official parties, such as central banks. For example, the European Central Bank expects inflation in the Eurozone to fall to 1.5% in 2023."  


So when will that structural, long-term inflation be lurking? Van Weegberg: "That kind of inflation is more likely to arise when we're faced with a wage price spiral. If wages rise too much, it pushes up the general price level because labor becomes more expensive. But a spiral like that only arises when high economic growth and low unemployment occur simultaneously. Unemployment in the Netherlands is low but in the Eurozone, it's still relatively high at 7.5%. That's why a wage price spiral now is unlikely."


Labor unions
In addition to the high European unemployment, there are two other reasons why we probably will not see the effect of rising wages on inflation, according to Van Weegberg. "The power of labor unions has diminished. Even in traditional industries such as the metal industry, far fewer workers are unionized these days. In newer sectors, the degree of organization is even lower. Add to that the increased number of self-employed workers and it's not surprising that the bargaining position of labor unions has deteriorated.  
In addition, the effect of rising wages on the general price level has also diminished. Globalization has meant that we've started to import more from countries with lower wages. That has pushed prices down for decades. So if our own wages rise, it will no longer lead to inflation as quickly as before." 


The 'specter' as it loomed in Germany in the 1920s is far off yet. And the inflation that is now occurring is actually quite healthy, says Van Weegberg. "We've had very low inflation for a long time, even less than 1%. Normally in Europe, we're around 1.5%. That 3% is well above that. I don't expect the ECB to raise interest rates in the next two or three years. But if persistently high inflation ultimately forces the ECB to raise interest rates, it will be better for everyone in the long run. The housing market may start to normalize again. And it's going to pay to save again. Presently, you have a loss of purchasing power on your savings. No government wants that."

Volgende publicatie:
Investors urge South Korea to step up its climate efforts

Investors urge South Korea to step up its climate efforts

Published on: 14 October 2021

APG lead signatory of pressing letter to Korean government

 

APG and 22 other large global investors encourage South’s Korea’s government to outline a clear and fully Paris-aligned decarbonization pathway and stop building new coal-fired power plants. Clear climate policies will help Korean companies to transition to net zero emissions by 2050 or sooner. APG is co-leading this investor initiative on behalf of its pension fund clients.

 

In a letter to South Korea’s Presidential Committee on Carbon Neutrality, the investors state that for many of the Korean companies they engage with, national policy on energy and climate change is critical to the achievement of their net zero ambition. The letter is supported by Climate Action 100+ and signed by investors with a combined €5.8 trillion in assets under management, including lead investors APG, BMO Global Asset Management, EOS at Federated Hermes and Sumitomo Mitsui Trust Asset Management.

 

Companies need clear climate policies

According to the signatories, South Korean companies need clear signals from policymakers to enable them to make a successful transition to net zero emissions, mitigate climate risk and protect long-term value. “This must include clear dates for phasing out coal in line with achieving the Paris objective of keeping global warming to 1.5°C,” the letter says.

The investors urge that the International Energy Agency’s recently developed Net Zero 2050 scenario be embedded in the transition pathways the Committee is developing. “It is critical these pathways are fully aligned with the Paris Agreement, reach net zero emissions by no later than 2050 and do not further embed coal in the Korean economy, delaying the inevitable and urgent transition that is required,” says Yoo-Kyung (YK) Park, Head of APAC Responsible Investment & Governance at APG. 

 

No coal expansion

In August, APG sent a separate letter to the Korean government to express its concerns about private coal-fired power plants under construction there. APG also sold its stake in the Korea Electric Power Corp. (KEPCO) last year, citing the state-run company's construction of coal plants in Vietnam and Indonesia. “The expansion of coal-fired power in South Korea goes against efforts to combat climate change,” says YK, “It also puts assets at risk of becoming stranded and unprofitable due to low utilization and extra efforts necessary to offset carbon emissions.”

 

Climate Action 100+ is the world’s largest investor engagement initiative on climate change. It involves more than 615 investors, responsible for over €47 trillion in assets under management. The initiative aims to ensure that the world’s biggest corporate greenhouse gas (GHG) emitters take action on climate change.

Volgende publicatie:
“Is the Chinese real estate crisis a risk for the world economy?”

“Is the Chinese real estate crisis a risk for the world economy?”

Published on: 7 October 2021

Current issues in the field of economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on whether the global economy will be hit by the sky-high debt of Chinese property developers. “The chance that all hell will really break loose and Chinese citizens will lose faith in the government’s ability to solve this crisis is small.”

 

Will the embattled Chinese real estate market cause a global crisis in financial markets, like what   happened with the collapse of Lehman Brothers in 2008? That is the question that has been occupying the minds of many investors since it became known that Chinese real estate giant Evergrande (total debt €260 billion) could no longer meet its interest payment obligations. According to Knaap, this is unlikely. “The first question is whether this real estate crisis is a threat to the Chinese economy itself. You can never know that 100 percent for sure, but there is only a small chance of that. This is because the Chinese government is in a much stronger position to intervene than Western governments, partly because it owns portions of the financial sector. If the government wants a company to get a loan from the state bank, then the company will get the loan. This way it can bail out companies when it wants to.”

 

Money back

Moreover, the Chinese have a lot of debt but mostly to themselves, says Knaap. That too contributes to the government’s ability to manage the economic risk. “There is no need to be afraid that foreign creditors will be on the doorstep, wanting their money back immediately.” 

  

A financial domino effect like the one caused by the fall of Lehman Brothers is therefore not likely, according to Knaap. “The risk of a crisis in a particular sector spreading to the entire economy is much smaller in China than it is for us, due to that dominant government role. People are not afraid to let things blow over. There are some examples of where this has gone well, such as Baoshang bank and Huarong asset management. Also, don’t forget that the Chinese government itself actually triggered this crisis. For that reason alone, it is a very different situation than with Lehman. At that time, it was not the government that provided the trigger, but the housing market.”

 

Taking on pain

In what sense did the Chinese government evoke this crisis? Knaap: “Chinese real estate developers are borrowing heavily and robustly. Those in power are now having some reservations about this. Because if debts continue to rise, the financial risk will simply become too great. To put a stop to this, the regulator introduced a number of rules last year. Because of these new, stricter rules, real estate companies with a lot of debt were no longer able to borrow money in the way they were used to. As a result, they had to rely on selling their own properties. In the end, that didn’t happen fast enough, so the debt-based growth model came to a halt. That’s painful. China has chosen to take on the pain while the problem is probably still local and manageable. And we should actually be happy about that. Because if things go well, this intervention will prevent companies’ debt position from really becoming a systemic risk.”

 

And that also keeps the risk to the global economy manageable, Knaap explains. “As long as the Chinese don’t panic, it won’t damage their economy and the problems in the real estate sector will probably be manageable. There is no crisis of confidence as with Lehman, in which there was a fundamental uncertainty in the financial markets. Globally, the economic impact is therefore limited to foreign creditors of Evergrande who are unlikely to get their money back. The likelihood for all hell to break loose and Chinese citizens losing confidence in the government to solve this crisis is small. But if that does happen, we will also notice it here, in the form of fewer exports and problems with product supply.”

 

Limit reached

However, according to the economist, we should take into account the effect of the stricter credit requirements on the debt accumulation of the Chinese. “The more borrowing is going on in China, the more we will notice this globally in an economically positive sense. Until now, China has always dealt with economic headwinds by taking on more debt and thereby investing in the growth of the economy. But the limit of that method has now been reached. Chinese people are less likely to get mortgages and some companies are no longer granted credit. This is at the expense of economic growth, and so people abroad are going to notice. That is the main effect and it will likely be felt globally." 

 

Volgende publicatie:
“Will our economy suffer from the tight labor market?”

“Will our economy suffer from the tight labor market?”

Published on: 26 August 2021

Volgende publicatie:
“Pension funds bear a huge responsibility, for the Netherlands of today and the future”

“Pension funds bear a huge responsibility, for the Netherlands of today and the future”

Published on: 29 July 2021

Annette Mosman took the reins as CEO of APG in March. She is hoping to gain as many inspirational insights as possible in the first months of her new job. That is why she is holding 25 meetings on her hike from Amsterdam to Heerlen. This was a journey through the Netherlands of Tomorrow, with a different person accompanying her on each leg of the trip. Her companions were colleagues, but also people from outside APG, like Tuur Elzinga, chairman of the Netherlands Trade Union Confederation.

The Rolling Stones, Bruce Springsteen, Coldplay and Pink: they all performed here. The Malieveld was their outdoor concert hall. That said, protesting trade unions also regularly take over the “Haagse grasveld,” the famous field in The Hague. There’s no doubt that Tuur Elzinga has also left many footprints in that field. His history with the trade union movement stretches back to 2002, when he was appointed as a policy officer at the Netherlands Trade Union Confederation. Almost twenty years on, he is now chairman of the trade union and employers’ and employees’ organizations since March 10 of this year, to be precise. He also represented the Socialist Party (SP) in the Upper House of the Senate for nine years. This means that he is as familiar with the green polders of the Netherlands as the green benches of the Senate.

 

Getting fat on the bones

Elzinga believes that things need to change in the Netherlands. In his opinion, the pandemic is a tipping point: the market-driven approach that has gone too far must make way for a revaluation of society. The pandemic has revealed how indispensable certain sectors are to our society, like health care, education and childcare.. “It is precisely those vital sectors that have fallen behind in recent years,” Elzinga reckons. Schools, hospitals and kindergartens have been run like businesses, and cut backs have been the order of the day. This has led to a shortage of ICU capacity, protective equipment and staff during the pandemic. “We need to get fat back on the bones again; we need proper reserves. That may not be very efficient, but it stops the whole of society from grinding to a halt when times get tough.”

 

Fears for the future 

The pandemic has also widened the gap between the poor – those with few prospects – and the rich. The Netherlands has become more prosperous in recent decades, but not everyone has benefited from this. The flexible labor market has put permanent jobs at risk and wages have not risen enough in line with profits. “Inequality has widened, and imbalances have occurred,” Elzinga tells us. Not to mention the climate crisis, from which there is no escape, both literally and figuratively, as we face extreme weather, forest fires and floods across the planet. Elzinga points out that this leads to unrest. “People are concerned about their own future and that of generations down the line. As a country, your sole aim may be to make as much money as possible, but what kind of home will we be leaving to our children and grandchildren if social cohesion is under pressure and our planet is being eroded?”

 

Plus another one million permanent jobs

Fortunately, the pandemic has also prompted politicians – from left to right – and some employers to realize that the Netherlands of Tomorrow demands change, believes Elzinga. He believes that we can start rebuilding the country without delay. We already have the blue print: broad-based prosperity for the whole of the Dutch population. That is the approach underlying the Social and Economic Council’s draft advice that trade unions and employers presented together this spring: a package of measures for the new cabinet. First and foremost, the labor market must be reformed: we must return to more permanent contracts, instead of flexible employment. Elzinga would like to see at least another one million permanent jobs. “People need job and income security. They want bread on the table, they must be able to pay the bills and have enough disposable income for their leisure time.”

The climate change price tag

Broad-based prosperity also calls for greater investments in public funds for vital sectors, like health care and education. For example, better terms of employment must stop the trend of having unmotivated employees: it may be more enticing to get out of bed in the mornings and take up the task of teaching if wages rise and work-related pressure is reduced. More must also be invested in the quality of public services, such as the Employee Insurance Agency, the tax authorities – here we have in mind the childcare benefit scandal – and yes, also pension administration. Elzinga says, “Better performance from institutions may also help to close the current gap in confidence.” For the long term, there needs to be substantial investment in tackling climate change. “We have to stop procrastinating and start addressing the issue. The longer we kick the can down the road, the higher the price tag will be.” So we need more funds to accelerate the energy transition, while at the same time being socially accountable by helping people who lose their jobs to get other work.  

   

Strong government required

Given the long societal wish list, the government can no longer keep its distance, Elzinga believes. Since the eighties, the maxim in The Hague has been: strong market forces, small government. “A market is a good for ensuring that there is enough to round, but you can’t leave everything to market forces,” Elzinga reckons. “We are now faced with the mess that the mantra of liberalization, privatization and deregulation has left us in.” Rebuilding the Netherlands calls for a stronger state, one that actively helps shape the society of the future through public participations and targeted investments, and legislation and regulation must ensure that market participants accept their social responsibility. This need for a government with a firm hand on the rudder does not stop at the borders. For example, Elzinga welcomes the G7 plan for a global minimum tax rate of 15 percent for multinationals. It will make tax avoidance through tax havens more difficult because it will put an end to competition among countries that lure foreign investors by having the lowest tax rates.

  

Tech giants

It is also crucial to have international regulations that curb the influence of Big Tech and Big Data. Elzinga adds, “Big tech companies are capitalizing on data that we as consumers are producing ourselves. They are using existing digital infrastructure, without giving anything in return.” The same is true of multinationals that are getting patents for innovations that they were not solely responsible for conceiving. After all, their smart employees are educated at publicly funded universities and draw on the body of knowledge that our knowledge-based society has accrued in centuries past-. We are standing on the shoulders of giants. “Data, knowledge, but also for example raw materials and energy sources such as the sun and wind and ultimately our entire planet: it belongs to all of us. What gives a handful of companies the right to claim ownership? Why should managers and shareholders be allowed to become wealthy beyond description from it, while employees and the rest of society have to make do with the crumbs?” says Elzinga.

I hope that one day it will no longer be necessary to strike

“Give employees control”

The pyramid must be turned upside down. That doesn’t call for revolution; instead it calls for a radical change in direction, through gradual, democratic means, according to Elzinga. He believes that the first tentative steps down this new path have been taken. Governments are slowly starting to take back their traditional role, companies are taking more responsibility for their environment and consumers, citizens and major investors are more inclined to hold them to account. The next step is to give employees and society a real say, Elzinga argues. “'Give those people who come up with all those innovative ideas a voice, the ones that do the real work, who are the actual rightful owners of companies’ products and services: all of us, in other words. Who’s the boss? Who decides? As it stands now, they are managers and shareholders; in the future we should all be able to be in charge.”

 

From shareholder return to social gains

In recent years, Elzinga has been conducting the negotiations for the pension agreement on behalf of employers’ and employees’ organizations of the Netherlands Trade Union Confederation. It’s a historic agreement; designed to keep old-age provisions affordable going forward, without abandoning the principle of solidarity. “In the new system, the contributions you have accrued are reflected more directly in your own pension accrual, but we will still ensure that people who are not so fortunate in their careers will also be able to have a good pension, and we will spread the risks across the generations.” That said, Elzinga believes that the pension discussion is far from over. If interest rates remain this low in the coming years and investment returns structurally decline in the future, as predicted, then it will not be possible to keep the promise of an indexed-linked pension and the trust gap in society will widen. Pension funds could then take the next step: from shareholder return to social gains.

 

Pension benefits in kind? 

Elzinga explains, “Pension funds should examine the needs people have later in life. Do they then only need money? Or would they rather have a nice place to live, good care and quality of life? Invest in that directly as a pension fund; put pension money into new kinds of housing for senior citizens, good care for the elderly and restoring social infrastructure, so that it is to hand when people need it.” This would be a type of pension in kind. And why only invest in provisions for old age? Pension funds can also be used to improve today’s society. Here we have in mind investments in the tight housing market – which mainly affects young generations – or in good education, for a robust Netherlands of Tomorrow. Elzinga adds, “Pension funds have major assets and that means they bear a huge responsibility, for the Netherlands of today and the future.” 

 

An end to strikes

During the pension agreement negotiations, the Netherlands Trade Union Confederation, together with the National Federation of Christian Trade Unions in the Netherlands and the Trade Union for Professionals, halted train traffic for a day to apply pressure for a slower rise in the state pension age. What does Elzinga think: will there still be strikes in the Netherlands of Tomorrow? “I suspect so. In the meantime, there will be conflicts of interest between employers and their workforces. But I hope that one day it will no longer be necessary to strike: if employees are given a real say, they can be part of the decision-making process and conflicts of interest will become a thing of the past. If you are the boss, there’s no need for you to strike.” So the Malieveld of the future will be solely for the successors of The Stones and Coldplay, in other words: the ultimate festival grounds? Elzinga laughs, “Yes, that’s where we’ll gather to simply have a good time, do stuff we enjoy or celebrate together, for example, the great pension system that we have in the Netherlands.”      

Volgende publicatie:
“When will the rise in the housing market stop?”

“When will the rise in the housing market stop?”

Published on: 24 June 2021

Current issues related to economy, (sustainable) investments, pension and income: every week, an expert from APG gives a clear answer to the question of the week. This time: macro-economist and senior strategist Charles Kalshoven, about the forecast of the Dutch housing market.


The prices of owner-occupied homes keep rising. Can that continue to go well? Kalshoven suspects it will. The economist thinks that the most likely (base)scenario is that the housing market is not going to collapse for the time being. The crucial factor in that is the interest rate.

“In the early nineties, we were still seeing percentages around 10% and the average interest rate in that decade was well above 6%. But it will not go up that high this time. We also expect that the rise will be very gradual, while incomes grow along with the economy. But for now, the ECB is keeping interest rates low, which is also reflected in mortgage rates. We think it may take five to ten years before interest rates reach a new, somewhat higher equilibrium. You shouldn’t think about the levels of the 1990s, or the ‘years zero’ - when interest rates averaged about 5 percent. For the homeowner, this is a favorable scenario, because low interest rates make everything more expensive. Stocks and bonds as well as homes.”

 
Surge

In a more unfavorable but also unlikely scenario, a new virus variant rears its head, with accompanying lockdowns. The global economy would be dealt another blow. 

Kalshoven: “In that scenario we would see low interest rates, but also high unemployment and many bankruptcies. Banks may then put the brakes on the provision of mortgages. In that case, a buyers’ market would emerge, with house prices falling. We see no signs of this scenario at the moment. There is no sign that the housing market is cooling.”


Another unfavorable scenario arises when the economy is going too well, strangely enough. In a tight labor market, employers are more likely to meet new wage demands. And that can lead to permanently high inflation. “Central banks would then have to raise interest rates. Borrowing then becomes more expensive and house prices may come under pressure. This happens especially if interest rates rise abruptly, because then the negative interest rate effect dominates the positive effect of rising incomes. But such a wage-price spiral is really still a long way off.”


Anyone who wants to understand the Dutch market for owner-occupied houses cannot ignore the scarce supply of houses. “That supply is not so flexible here. We live in a small country, where you can’t just build more - partly also because of the strict rules. So, if demand increases, the housing market can only respond in one way and that is by raising prices. There are now plans to build 1 million houses by 2030, but I have yet to see it. You can’t live in plans.”


Big bag of money
So, the Dutch are putting more and more money on the table for their homes. As to where that money is coming from, Kalshoven doesn’t have to think long. “Since the early 1990s, interest rates have fallen sharply and, at an average of 1.6 percent (April figure - ed.) they are still historically low.  As a result, buyers can bid more on a house, which drives prices up. For those who don’t own a house yet, it is unfavorable, of course.”


Besides those low interest rates, there are other reasons why we can enter the housing market with such a big bag of borrowed money. “The lending standards have also become more flexible. In the 1980s you could only get a mortgage on the income of the breadwinner. Later, you could also add the income of the part-time working partner - usually the woman. And women have also started working more, so double earners can get higher mortgages.


Buoyant

So it is mainly the persistently scarce supply and the long-term low interest rates that are the foundations of the Dutch housing market. Unless the economy surprises us unpleasantly, those foundations are not going to fall away anytime soon. The market for owner-occupied homes will remain buoyant for the foreseeable future.”

Volgende publicatie:
“Will the computer chip shortage lead to inflation?”

“Will the computer chip shortage lead to inflation?”

Published on: 17 June 2021

Current issues in the fields of economics, (sustainable) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap, about the economic consequences of the worldwide shortage of computer chips.

 

“The simplest and most immediate effect is that chip machine manufacturers are doing well. As of the end of October, ASML’s share price has now risen by 85 percent, while the AEX has risen ‘only’ 37 percent over that period. But of course, this will not continue. For an investor in chip machine manufacturers, it is helpful to know that the demand for chip machines has some of the same characteristics as the hog cycle. When the demand for pork chops - and therefore the price - is high, hog farmers expand. On the other hand, when that new meat comes onto the market, there is immediate excess, which then brings the price down. The same is true of the market for chip machines. As with pig farmers, it takes a while for new supply to be created. This carries the risk that in a few years there will be a surplus of chip machines and chips. An investor in chip machine manufacturers must therefore know exactly when to stop.”


Bottleneck
The indirect effect of the chip shortage is much greater, Knaap explains. “You can’t think of anything without a chip in it nowadays. The shortage is a well-known bottleneck for car manufacturers, but it is currently affecting the entire supply industry. When it doesn’t get enough chips, it also leads to a shortage of other parts. There is a risk that the Western economies will stall because of this shortage.

Everything is expensive now, not only chips but also oil. If the prices of many components and semi-finished goods go up, in the worst-case scenario a situation similar to the oil shocks of the 1970s will arise. The big question hanging over the market is: will it lead to inflation? That is the fear of many investors. Central banks are now pursuing a loose monetary policy by buying up government bonds and corporate bonds, among other things. This is good for investors, because it pushes up the prices of bonds and shares. But if inflation does occur, central banks lose the excuse to pursue this broad monetary policy. They must then stop buying bonds and in that case the mechanism works the other way round. The chance for stock markets to fall increases and, because the current monetary policy has been pursued since 2008, you could even see a major correction. It may be a bit of a shock to investors.”


Crypto currency
The main cause of the worldwide shortage of chips was the extremely high demand caused by the Covid-19 pandemic. Working from home, and the increased demand for game consoles in particular, played a role in this. Still, according to Knaap, that’s not the whole story. “The demand for chips has also increased due to the increased popularity of crypto currencies. A lot of chips are needed to mine bitcoins. And there is also a lot going on on the supply side. In the early 2020s, many companies in Asia were at a standstill due to lockdowns. You can still see that in the availability of goods, including chips. Plus, Covid-19 made us ask ourselves whether we want to be so dependent on foreign producers for certain products - mouthguards, medical equipment, and so on. The answer is no. There will be more production in Europe and the US again, rather than in China. That’s good for our independence. But it does mean that everything will become more expensive.”

Volgende publicatie:
“My wife would be proud of me because I am enjoying life”

“My wife would be proud of me because I am enjoying life”

Published on: 25 March 2021

How do you deal with work and money for now and later in life? Do you live day by day or do you deliberately plan your financial future? And will you deal with “later in life” yourself, or are you part of a pension fund?

Ruud Vorstermans has been enjoying an excellent pension for the past year and a half. But he would trade it all in if it could bring back his wife.

 

 

Ruud Vorstermans (68)

Profession: retired, worked in automation and as a labor expert

Weekly hours: full-time

Income now: 3,200 Euros net per month

Saving: about 50,000 Euros

Pension arranged? Yes

 

You have been retired since August 2, 2019. How do you like it?

“I did not experience any black hole, even for a second. In fact, I don’t have enough time. I was really ready not to have to do all kinds of things anymore. That is also because, in addition to my work, I was the primary caregiver of my wife for years. She had metastasized breast cancer and died of that in 2018.”

 

That is sad, you must really miss her.

“Yes, my wife brought out the bet in me. We were married for nearly 43 years; what we had was unique. Of course, I miss her, but getting stuck there doesn’t help anything. Four weeks after her cremation, I went to Italy for a month with a camper. I traveled around Toscani, to places where we used to go together every year. A trip down memory lane. I enjoyed it a lot. I am keeping the memory of her alive. On our first wedding anniversary after her death, I got dressed up and went to her favorite restaurant, in a suit and tie and sat down with a picture of her across from me. I really enjoyed doing that and I still do it every year.”

 

How do you spend your days, now that you are no longer working?

“To start with, I walk and ride my bike a lot. I have made it into a daily routine to walk about seven kilometers. I ride an electric bike, because then I can also cycle on vacation in hilly landscapes. And I have given myself a new hobby: doing jigsaw puzzles by Jan van Haasteren. Once in a while, I buy a second-hand puzzle through Market Place or Facebook. If the seller lives within a 20-kilometer radius from where I live in Bergen op Zoom, I go and pick it up on my bike. That gives me a nice goal for my bike trip.”

And what else do you do?

“Sudoku, cross word puzzles, sometimes I write poetry, I have a blog, I cook. My wife was a great cook. When she got sick, I started to use her recipes so that she could give me instructions. I took pictures of everything and made it into a cooking blog. That helped me a lot, especially right before she died. I also do volunteer work for the breast cancer society. My wife did that too, from the day she got breast cancer until she died from it. She was given an honorary membership for that. It soothes me to continue her work. I have a Facebook group for women with metastasized breast cancer. Because I see the positive in everything, I try to give others who don’t do that a different vision. Life doesn’t stop when you’re sick; try to enjoy what you do still have as much as possible.”

 

Don’t you miss your professional life at all?

“No. I enjoyed my work for 46 years, but that was enough.”

 

What kind of work did you do before this?

“In 1975, I started at the former GAK (common administration office, ed), my dad worked at the head office in Amsterdam. I had no idea what I could do with my high school education and my dad said: why don’t you try working here. I got to try out automation and I stayed there for 25 years, and eventually became a manager. But at a certain point I needed a change. In the early nineties, I went back to school and completed 3 higher education courses; a legal one, related to personnel issues, commercial economy and business management. After that I started to work as a labor expert. First at the former UWV and later in health and safety services. That’s what I did until I retired.”

 

Did you do that full-time?

“More than that. I started at six in the morning and didn’t go home until after rush hour. I worked about 12 hours a day. But that really paid off. All those extra hours provided me with a 30 percent bonus and if you achieved a certain target, you could get an extra bonus on top of that. That’s what I used to buy our first camper.”

 

What was your income before you retired?

“My monthly salary was 5,500 Euros gross.”

 

And what is your income now, from your Old Age Pension and your company pension?

“Annually about 55,000 Euros gross, which works out to about 3,200 net a month. In addition to Old Age Pension and my own pension, I also get a survivor’s pension of 87 Euros a month. My wife only worked part-time for about fifteen years.”

 

Are you happy with what you get?

“I realize every day that I have an excellent income. I would trade all the money in the world to get my wife back, but that is not an option, and I’m very happy with this. It is very comfortable. In fact, I am able to save 1,000 Euros every month. My kids, who make a lot more money than I ever did, say: come on, Dad, why don’t you buy a new TV? But why should I? Would it make the programs any better? I spend my money consciously. When I didn’t have a lot of money, I bought all kinds of things, but now that I have money, I’m like Uncle Scrooge.”

When we realized that my wife was not going to get better, we shifted our life into 6th gear

What are your regular expenditures?

“I spend about 1,500 Euros a month on my mortgage, car, taxes, insurances and subscriptions.”

What else do you spend money on?

“I enjoy eating out and going to the theater. These days, during corona times, I sometimes order take-out. And I regularly go on vacation. The camper is ready to go to the Veluwe in two months.”

 

How much do you have in savings?

“About 50,000 Euros. It used to be a lot more, but when we realized that my wife was not going to get better, we shifted our life into 6th gear. Before that, we already did a lot, but instead of going to a concert in De Kuip, for example, we would go to concerts in London, Dusseldorf or Dublin. Just to make it even more memorable. We also took trips to America and Indonesia. In about six years we spent about $100,000 in savings. It was a little scary to my wife sometimes; she would worry that we wouldn’t have enough left for the maintenance of our house. But I wanted us to enjoy our life together while we still could and make memories. And I still enjoy them every day. I think she would be proud of me, because, despite the fact that I miss her, I am enjoying my life to the fullest.”

Volgende publicatie:
"We need a different definition of a good life"

"We need a different definition of a good life"

Published on: 22 February 2021

Two economists on a different form of economic growth

 

Economic growth is beginning to take its toll on people and the environment. Nature has reached its limits and people are rebelling against the unequal distribution of wealth. According to economists Hans Stegeman of Triodos Investment Management and Charles Kalshoven of APG, we need a drastically different way of thinking. "People are getting a different sense of what is valuable."

 

Hans Stegeman is a Chief Investment Strategist at impact investor Triodos Investment Management. He regularly publishes about the boundaries of the current economic system. Charles Kalshoven is a macro-economist and senior strategist at APG. In his columns, he discusses economic developments and how they affect our daily lives.

 

Hans, as an economist, you regularly publish about your belief that the current system of striving for endless economic growth is no longer sustainable. What do you mean by that?

"I'm not against economic growth, but it does have major negative consequences for the planet: climate change, increasing social inequality and the drastic decline in biodiversity. Some say that new technology can solve those problems, but I haven't seen any convincing evidence for that. I sincerely hope technologies such as CO2 capture (capturing CO2 as soon as it is released during combustion and thus preventing it from entering the air, ed.) will help, but I have my doubts. I really think we need to move to a different form of growth. Incidentally, I think economic growth is a limited concept for measuring progress. Growth doesn't always equate to happiness or well-being."

 

Charles: "Classic economic theory sees economic growth as the outcome of capital and labor. But since the industrial revolution, an important factor has been added, namely energy. And so far, this has mainly been fossil energy. This comes at a price, in the form of damage to people and planet. But it's not or insufficiently passed on in the price of products."

 

Still, poor countries need economic growth to get out of poverty.

Charles: "That's a dilemma. If you want to fight poverty, you need economic growth. And that in turn leads to a greater demand for energy. On the other hand, you want to limit the use of energy to combat climate change. So we have to look for a different kind of growth that requires less energy and makes more use of renewable energy. We need to handle raw materials more carefully and reuse them; we have to transport less stuff and people all over the world. What helps is that economic development usually leads to smaller families and thus lower population growth. And that benefits the climate."

 

Hans: "The boundaries of our ecosystem are rock-hard. There's only one planet earth. That can't be changed. We'll have to find a way to create prosperity for everyone within these limits. Prosperity is very unevenly distributed. The richest 10% of the world - and that includes most of the Dutch - are buying more and more stuff, without really being happy about it. While at the same time, there are billions of people who are starving and barely have a roof over their heads. This should be fairer."

 

How do we get such a sustainable, fair form of economic growth off the ground?

Hans: "We have to think differently in the West. We live in a competitive world where everyone wants to race to the top. With an expensive watch or designer clothing as a status symbol. But do they really make us happy? Or are they values such as togetherness and being satisfied with what you have? To achieve such a change in thinking, all parties involved must cooperate, the government, businesses, consumers and investors. You have to play chess on all boards. And each game starts from a different point. That's very complex."

 

Charles: "We need a different definition of 'a good life'. Currently, it's mass consumption. And status. But the things that bring status can change. The younger generation no longer thinks it's 'cool' to work 80 hours a week, and attaches importance to other things than making a lot of money. The government also has a role to play in this. It has to create a remote prospect, something we all want to aim for. And then stimulate this with laws and regulations. For example, by including the costs of CO2 emissions in the prices of products."

    Hans Stegeman (left) and Charles Kalshoven

 

Has 'corona' changed our way of thinking? Has it brought a sustainable economy closer?

Hans: "People are getting a different sense of what is valuable. For example, I asked if this interview could start 15 minutes earlier, because I wanted to pick up my son from school on the sleigh. What I've learned is that people are motivated by positive rewards, not by the deterrent effect of a negative outlook. If we want to change something in our economic thinking, we achieve the most by inspiring with positive examples. In particular, indicate what is possible and how this can contribute to our well-being."

 

Charles: "I've noticed that corona has had an influence on politics. In Europe, corona has really given a boost to green initiatives, such as the Green Deal (an action plan to make the economy of the European Union sustainable, ed.). The attitude of governments has also shifted from austerity and financial discipline to investing in society and supporting affected people and businesses. Increasing public debt is no longer as taboo as before.

 

Hans: "The virus has made us more aware of our relationship with nature. I do think that the government has missed an enormous opportunity by not attaching any conditions to support for businesses, such as Schiphol. This would have been a great opportunity to accelerate the sustainability of Schiphol. Maintaining something that isn't sustainable is actually a waste of money."

 

What role can pension funds and investors play in making the economy more sustainable?

Charles: "We play an important role with the money we manage on behalf of our pension funds. And that goes beyond excluding producers of bad products. We talk to businesses. For example, about how they can make the switch from fossil to sustainable energy. Or because we think they're doing very well and we want to share their example with other businesses we invest in. One example is Arcadis, which started to report on how they contribute to the Sustainable Development Goals, partly through discussions with us. The challenge is that there's still far too little information about the sustainability of businesses and projects. We therefore press businesses about it and contribute to the development of sustainability standards, so that as many investors as possible speak the same language."

 

Hans: "As an investor, you need to know where you want to go. And contribute to that. That goes much further than a CO2 footprint that's lower than the market. The market as a whole is a reflection of the world and the world is far from sustainable. At the start of our investment process, we determine which positive developments we want to contribute to and that's what we invest in. Examples include micro-finance, solar panels or online platforms where you can buy food products directly from the farmer. Things like nuclear weapons and fossil energy are not part of that."

 

Triodos Investment Management has customers who consciously opt for a 'green' investor; APG serves pension funds which participants must be affiliated to. Does that make a difference in the way you can implement responsible investment?

Hans: "Triodos once started excluding certain investments on ethical grounds, and that has evolved towards a focus on positive impact. APG naturally has to deal with the expectations of participants in the pension funds for which it works. APG is given a specific mandate from the pension funds and this involves a specific policy. But it could be stricter, as far as I'm concerned. There has to be a lower limit. If the core of a business isn't sustainable and improvement discussions come to nothing, you have to leave. APG could also explain in more specific terms what positive impact it wants to achieve."

 

Charles: "We believe in the power of engagement (improvement discussions with businesses, ed.). If you sell all fossil energy companies, it won't make the world any greener. By talking to them, you can bring about positive changes. Companies such as Shell and BP understand very well that we have to move to a different form of energy. There's a lot of knowledge and money in the energy sector. We must take advantage of that. With assets of over € 500 billion, we can also take relatively large stakes in companies, which allows us to exert influence. But we also sell a company if engagement doesn't work in the end."

 

Hans: "There are fossil companies that are switching to green energy. Ørsted from Denmark, for instance. But the real change isn't going to come from the big oil companies. Most still want to milk their oil supplies for as long as possible. Rather, change comes from small businesses with smart, new ideas. We take relatively large stakes in these types of start-ups and non-listed companies. This allows us to exert influence right from the start."

 

Is investing in a sustainable economy at the expense of the returns you can achieve?

Hans: "Not in the longer term. Of course, in a year of rising oil prices, we won't benefit from it. But we won't be bothered by this in the longer term. Also, sustainability information provides additional insight into a business. It's a persistent myth that sustainability comes at the expense of returns. There are numerous studies that indicate that this is not the case."

 

Charles: "I agree. Responsible investing not only tackles financial risks, but also other types of risks, such as the risk that your real estate properties will flood due to climate change. If you know exactly where this is happening and take preparatory measures, you actually reduce the risk of your investments. Unsustainable investment, now, that's a risk."

Volgende publicatie:
APG advocates ‘just transition’ in the automotive industry

APG advocates ‘just transition’ in the automotive industry

Published on: 16 November 2020

Corporate Human Rights benchmark includes sector for the first time

 

The shift to a low-carbon business model has taken center stage in the automobile sector, but the implications for workers and communities are often overlooked. That is one of the findings of the Corporate Human Rights Benchmark (CHRB) published today, of which APG is a co-founder. On behalf of our pension fund clients, we advocate a ‘just transition’ and urge car manufacturers to invest in employee resilience and prevent human rights risk in the supply chain.

According to the CHRB, automotive companies do not yet sufficiently demonstrate that they work with suppliers or set expectations to prevent human rights issues. This is particularly relevant given that the sector relies on supply chains with numerous areas of risks for human rights violations. It is the first time that the automotive sector is included in the benchmark.

Increased awareness

Anna Pot, Head of Responsible Investments Americas at APG Asset Management US, welcomes the inclusion of more companies and sectors in the CHRB. “The results suggest that the implementation of core human rights principles in still weak in the automotive sector. But experience shows that publication of the benchmark can have a positive effect on corporate awareness and overtime lead to improved human rights performance. The ICT sector, for instance, was added last year and now the average score of these companies has substantially improved.”

Although the automotive sector is newly added to the CHRB, the sector is not ‘new’ to APG in terms of human rights engagement. Pot: “On behalf of our clients, we have until the end of 2019 been engaging with thirteen large car producers to improve labor conditions and tackle child labor in cobalt mining. Cobalt is an indispensable raw material for batteries in electric vehicles. We have made progress. For instance, Renault initiated inspections of the cobalt smelters it does business with, and Daimler has created a program to support local communities.”

Insight in human rights performance

APG, on behalf of its pension fund clients, co-founded the CRHB in 2017 and actively takes part in the development of the benchmark. “We contribute to this since we, as stewards of capital, are keen to improve corporate human rights performance,” Pot explains. “The CHRB provides good-quality data about an increasing number of companies which we, as a responsible long-term investor, need to make investment decisions and engage with investees.”

The CHRB benchmarks the human rights performance of companies in the apparel, agriculture, extractives, ICT and automotive sectors. Companies are assessed on 100 indicators based on the United Nations Guiding Principles (UNGP), using publicly available data on issues such as labor conditions, workers’ safety and living wage. This year however, the full assessment was only made for the automotive sector; the other sectors were assessed on a smaller subset of indicators. 

‘Just transition’

The automotive companies included in the CHRB were also assessed by the Climate and Energy Benchmark. Interestingly, some car manufacturers that demonstrated action on climate issues – such as carbon reduction targets – disclosed little information on human rights (and vice versa). “This suggests that the sector considers climate and human rights issues separately, despite them being increasingly recognized as interconnected,” says Pot.

The emission-intensive automotive sector faces the challenge of shifting to a zero-carbon economy while upholding the principles of a ‘just transition’. Pot: “That is why we are engaging with car producers on the impact of this transition on the workforce and local communities. Automation, industry transformation and digitalization could result in the loss of thousands of car manufacturing jobs. We encourage producers to make their workforce part of the transition by offering training and development opportunities.”

With regard to the other sectors, the CHRB results show an overall improvement in the scores across indicators, especially on public commitments to protect human rights and grievance mechanisms. The lower areas of improvement relate to human rights due diligence. This is the process a business is expected to follow to identify, assesses and act on human rights risks. Pot: “A growing number of companies are getting better at the fundamentals, but there is still ample room for improvement.”

Volgende publicatie:
What the American elections (could) mean for our retirement

Trump or Biden?

Published on: 2 November 2020

 

What the American elections (could) mean for our retirement

 

Like a pebble in a pond, events on the other side of the world affect our economy. This is especially true for developments in the US, still the most powerful nation on earth. Will the next president also determine the coverage ratio of Dutch pensions?

 

The global economy is a cohesive whole in which changes in one country can have a major impact on another. Global stock markets often react to events in the US and to statements made by US politicians. “It is a very important country from many economic perspectives,” Rabobank’s chief economist Menno Middeldorp recently said on BNR News Radio. “America is one of the largest economies in the world. In addition, we have more of our investments and pension funds in America than in any other country.”

 

Eyes and ears

When something changes in the US - for example due to elections – then, as an investor, you can notice it, confirms Thijs Knaap, Senior Investment Strategist at APG Asset Management. “Even if you haven't invested one dollar in the US. Even if you buy a purely Dutch company, such as Philips or Aegon, you still have to deal with the fact that these companies are active all over the world, including - for a substantial part - in the US”.  As a global investor, APG is active in the US, of course. Rajiv Mallick, Head of Risk Management, US, says that APG-US manages $108.3 billion (September 2020) for APG and its Dutch clients. From New York, he says: “Our pension funds and their participants benefit from extensive local investment expertise”. He describes the office as the “eyes and ears” of APG in the US.

 

Shocks and trends

The Dutch financial interests in the US are substantial. However, creating a link between the election results and the consequences for our economy - and thus our pensions - is not that easy, according to Knaap.  “Between the elections and the Dutch pensioners there is quite a bit of static on the line. Although it sometimes seems as if politicians have power over the economy, their influence is actually limited. A lot depends on economic shocks and trends”. Nevertheless, presidential elections do have an effect. Knaap remembers that the (unexpected) victory of Donald Trump in 2016 led to a rise in US interest rates. Investors expected the government to borrow more and that this would lead to inflation. The first thing happened, the second did not. Because of this expectation, the US 10-year interest rate at the end of 2016 was more than half a percentage point higher than just before the elections. Because interest rates respond to each other globally, the funding ratio of Dutch pension funds also increased as a result. This enabled many funds to avoid a discount.”


Healthy growth

Given the interests at stake, investors are closely following the U.S. elections.  Mallick is too. “We are carefully monitoring potential policy changes in several sectors, including healthcare, energy, finance, education and taxation. After all, one president is not the same as the other. An example: when Trump won the previous elections, he reopened the coal mines that his predecessor Barack Obama had just closed for environmental reasons. Heavy industry benefited. Joe Biden, as a Democrat, could undo that.” What Knaap pays particular attention to is the influence of America on global growth, and on international relations. “Trump has reduced corporate regulation and lowered taxes. At least in the short term, this is good for growth and for the profits that are ultimately shared with investors. In the longer term, however, you may wonder if we don’t need the rules for preserving our environment just as much for healthy growth.”           

 

America first

If Trump gets to stay, it is very likely that he will continue to implement the protectionist measures based on his “America first” policy. This could have consequences for the turnover and shares of Dutch companies, whose access to the large American market would then be impeded. World trade would also suffer as a result. The stock exchanges virtually always react negatively to such impediments.

Knaap is seeing that America has played a much smaller role in many international contexts under Trump in recent years, while tensions with China have increased. This incapacitates institutions like the WTO (World Trade Organization). “For the upcoming elections it seems to be a choice between a continuation of this policy and a - partial - return to the old situation.”

 

Blue wave

More attention is being paid, however, to a “blue wave”: a victory for Biden, with a majority for the Democrats, the “blues”, in Congress. Investment Manager Simon Wiersma gives a prediction on the ING website that the Democratic support and stimulus packages could lead to a broad stock market trend of investors who want to anticipate economic recovery. “No matter who wins, the financial market will be affected by the elections either way.”

Research conducted by the U.S. Bank over the past 90 years shows that the stock market rises by an average of 6.5 percent in the year after a president is re-elected, while growth with a new president is only 5 percent. But the bank also concludes that equities do much better under a Democratic president than a Republican in the longer run.

 

2 Scenarios

Finally, we ask strategist Thijs Knaap to outline 2 scenarios: what are the financial prospects under 4 years of Democrats and under 4 years of Republicans?

 

Biden

It seems that the Democrats are looking for more international cooperation again. The inequality, which has continued to increase under Trump - although the trend has been going on for much longer - could possibly be reversed by Biden's plans for a higher minimum wage, among other things. Investors seem to think that this could boost spending in the U.S., and thus growth. Because the return on investments must ultimately always come from economic growth, that could be good for our participants.”  

 

Trump

The Republicans seem to be planning to build a different model than the one we entered the century with. That model is more bilateral (America trades with countries, not as part of coalitions) and transactional (“quid pro quo”); not based on rules. A consequence of that model, at least under Trump, is unpredictability of policy. In general, investors are not very keen on this, because it discourages investment”.

Volgende publicatie:
"Our ability to change is considerably larger than we thought"

"Our ability to change is considerably larger than we thought"

Published on: 12 June 2020

How do three top managers in Dutch business deal with the company- and personal challenges that the global corona crisis poses for themselves and the organization?

 

What insights has the crisis yielded so far, what does Activity Based Working mean for the organization and what will these managers take into account in the much-discussed 'new normal'?

 

These questions were at the heart of a virtual roundtable on leadership in crisis time with directors from different sectors. Board member Annette Mosman was one of them.

 

Read the full article (Dutch) in Management Scope.

 

Photography: ABN AMRO / Maartje Geels / APG

Volgende publicatie:
APG, NPS and Swiss Life acquire Portuguese toll road operator Brisa

APG, NPS and Swiss Life acquire Portuguese toll road operator Brisa

Published on: 28 April 2020

APG, the National Pension Service of Korea (NPS) and Swiss Life Asset Managers have entered into an agreement to acquire an 81.1% majority interests in Brisa, a leading European toll road platform. The sellers value the company at more than €3 billion.

Brisa holds a total of 21 motorways in Portugal with a total length of over 1,500 km. The network covers the fundamental axis of the Portuguese road system, with over 7.5 million customers driving on the roads per year.

 

Jan-Willem Ruisbroek, Head of Global Infrastructure Investment Strategy at APG: “This investment in Brisa, on behalf of our pension fund client ABP, matches our strategy to deliver stable, long term returns in prime infrastructure assets worldwide. The company benefits from a high quality and well diversified road network and is a key contribution of economic development to Portugal. We now look forward to working with José de Mello and our consortium partners to facilitate the continued delivery of high-quality service for motorists and commuters and continue innovating in the road and mobility services segment.”

APG makes this investment on behalf of its pension fund clients ABP and APG PPF.

Closing of the transaction is subject to approval by the relevant regulators, which should occur during the third quarter of this year.

 

Read the press release here

Volgende publicatie:
APG contribution to Netspar research on housing, care and pension

APG contribution to Netspar research on housing, care and pension

Published on: 1 February 2016

The theme of housing, care and retirement is high on the agenda of the ESC and various ministries. It is also subject within the broad social dialogue pension. From the point of financial planning for the individual household did the Netspar project "Housing and Retirement 'research into better alignment of the three domains.

 

Roadmap integrated approach

The government is taking in favor of a combination of more customization and choice, to better meet the characteristics and preferences of participants. From the point of financial planning for the individual household did the Netspar project group "Housing and Retirement 'research into better alignment of the three domains. On that appeared in early February 2016 "The roadmap to a more integrated approach to housing, care and retirement.

 

Big impact

The connection between housing, care and pension may, by the great impact it has on the financial life planning, relevant to many people, whether they are building up pension, have their own home or in need of additional (elderly) care. Housing takes the connection to retire somewhere else than care. Housing has as retirement savings a role in capital formation /, while care is more an insurance character. Nevertheless, there are relevant links between care and retirement living, think live at home longer by the elderly or the use of a one-off retirement for specific uninsured care needs. The report describes the trends, problems and solutions.