AEGON Asset Management
Olaf van den Heuvel
Head of Tactical Asset Allocation
CFA Forecasting dinner
Enough already
Financial innovation
Emerging Markets
Stability
2
Enough already II
Growth and debt for 18 OECD countries
Source: BIS

3
Historic analysis tells us growth is negatively impacted if debt/GDP exceeds
230%
Enough already III
Government debt
as percentage GDP
United States
Japan
Germany
France
Greece
Netherlands
Portugal
Spain
Source: BIS

4
It is contagious!
1980
46
53
31
34
26
65
36
27
2010
97
213
77
97
132
76
107
72
Total debt (government,
household and corporations)
as percentage GDP
2010
268
456
241
321
262
327
366
356
Austerity
5
10 Years + of the Euro: benefits and imbalances
What happened and did not happen
6
Resulting in:
EMU created one of the largest economic areas

Reduced transaction costs

 McKinsey calculates EMU effects on GDP at ~0.3%pt p.a. for the
Increased intra-EMU trade

 Germany strongly profited from an increase in competitiveness
Resulted in low inflation

Reduced interest rates / interest rate differentials

Resulted in further integration of financial markets

Resulted in economic convergence

Disciplined national budgetary policies

 Increased economic growth throughout the eurozone ...
eurozone (over period 1999 – 2010)
 Peripherals strongly profited from lower interest rates
 ... but also a build-up of economic imbalances
 Productivity differentials
 Government finances where not sufficiently redressed
 Low interest rates contributed to increase in household deficits and
housing market bubbles
The issue
7
Sustainability and required integration
Degree of
integration
 Agreement has been reached on tighter budget rules
►
High
“United States
of Europe”
►
►
Ad hoc conditional crisis loans have been provided, but
not a systemic solution (ie eurobonds, EU IMF)
Marshall plan for peripherals
Fiscal union
 Insufficient integration (too little, to late) increases
likelihood of core eurozone scenario
Fiscal union
Eurobonds
Budget rules and
“Marshall plan”
for peripherals
Enforceable
budget rules
Core
Eurozone
High
8
 More will probably be needed
►
Fiscal,
economic and
political union
Present
Eurozone
“The proof of the pudding is in the eating”
Sustainability /
Market credibility
Cyclical outlook
Leading indicators
65.0
60.0
55.0
50.0
Eurozone PMI
45.0
Germany PMI
40.0
Italian PMI
US PMI
35.0
Source: Bloomberg, Datastream
9
nov-11
jul-11
mrt-11
nov-10
jul-10
mrt-10
nov-09
jul-09
mrt-09
nov-08
jul-08
mrt-08
nov-07
jul-07
30.0
Economic outlook
GDP
US
2012
2013
2014
2015
Inflation US
2012
2013
2014
2015
10
2.0
1.7
1.8
2.7
Euro zone
UK
0.7
1.0
1.1
1.7
2.4
2.8
2.7
2.7
Euro zone
UK
1.8
1.7
1.6
1.6
Japan
1.1
1.6
1.7
2.1
1.2
1.2
1.6
1.9
Japan
3
2.9
2.9
2.9
-0.5
-0.4
-0.3
-0.3
Low growth for longer
Not necessarily bad for markets
11
Valuation good predictor of long term equity returns
12
Components of equity returns

13
Dividend yield and positive effect of rerating of equities cause a higher expected
return in Europe compared to the US
Basecase
Expected returns
Annualized returns until 2015
EU AAA Sovereign
Italian Sovereign
US Sovereign
Inflation Linked Bonds (EU)
EU Investment Grade
EU High Yield
US Investment grade
US High Yield
EMD
Lev loans
ABS
Equity - WORLD
Equity - US
Equity - EU
Equity - EMERGING MARKETS
Real estate - WORLD
Commodities
14
-1%
5%
-1%
0%
3%
7%
1%
3%
4%
5%
8%
7%
5%
9%
8%
9%
3%
Discuss!
15
High level indication of main (potential) costs and benefits
Scenario
Fiscal Union
flight forward
(60%)





Funding rescue mechanism (larger than present ESFS)
Debt restructurings to restore sustainability
Fiscal transfers
Negative impact on economic growth from tough austerity packages
Loss of sovereignty
Benefits
 Exchange rate stability continues
 Potential as political and economic powerhouse survives
 Institutional changes plus forced restructuring of pressured
countries improves stability and long term growth outlook
 Avoids costs of break-up of Eurozone
Core
Eurozone
economic
convergence is
leading (30%)
 Loss of exchange rate stability and return to competitive devaluations,
with negative growth impact and deflationary risks for Core Eurozone
and inflationary risks and higher interest rates for exiting/devaluating
countries
 Increase in euro-denominated debt burden for exiting countries,
triggering defaults including systemically important banks
 Membership of Core Eurozone driven by high degree of economic
convergence and therefore less need for rescue mechanisms and
fiscal transfers
 Pressured countries restore competitiveness through devaluations
Break-up
Eurozone,
survival EU
large step
back (9%)
 Further loss of exchange rate stability
 Larger growth, inflation and interest rate risks
 Wealth effects from redenomination of all debts and assets, triggering
defaults including systemically important banks
 Monetary policies can be better aligned to domestic circumstances
 As above, plus negative growth impact from break down of
cooperation, harmonisation and integration and increase in isolation
and protectionism
 Complete loss of Europe as (potential) political and economic
powerhouse
High
 Maximum sovereignty
Break-up EU
chaos (1%)
16
Costs
Small