Excellent, but not perfect

Transcription

1 ING Investment Office Publication date: 17 November 2017, 16:50 p.m. Monthly Investment Outlook November 2017 Excellent, but not perfect October November Asset allocation Equities Real estate Commodities Alternatives Fixed income Geographic allocation equities North America Europe Japan Emerging markets Pacific (excluding Japan) Sector allocation equities Energy Materials Industrials Consumer discretionary Consumer staples Healthcare Financials Information technology Telecommunications services Utilities Fixed income Sovereign bonds Investment grade corporate bonds High-yield bonds Emerging markets Changes in the sector allocation The perfect picture: this is how many investors see the current situation on the financial markets. The global economy is doing well, corporate earnings are excellent and the central banks are only very gradually phasing out their accommodating policies. Investors therefore currently have high expectations. The perfect picture naturally does not exist, and there is a chance of disappointment. In our view, a number of factors should be taken into account. For example, inflation expectations are very low and inflationary pressure may increase in the coming period. In addition, in the United States (US) President Trump s tax plan if adopted by Congress could push up interest rates at a faster pace. We are vigilant, but for the time being we see no reason to adjust our tactical asset allocation. We are, however, reducing the weighting of the healthcare sector within equities. Within the information technology and financial assets sectors, we will take some profit. With the proceeds we will buy more equities from companies in the telecommunications services sector. The weighting of this sector goes from underweight to neutral, while the weightings of the information technology and financial assets sectors remain unchanged. Highlights The economies in the most important regions are doing well. The quarterly figures of many companies were positive. Central banks are very slowly turning off the money tap. In short: the perfect picture for the financial markets We are nevertheless vigilant: too low inflationary expectations represent a risk as does a delayed implementation of Trump s tax plan. For the time being the signals are green and we are sticking to our tactical asset allocation. We are, however, reducing the weighting of the healthcare sector within equities we will take some profit in the financials and information technology sectors but invest more in the defensive telecommunications services sector.

2 Goldilocks sentiment on the markets Investors are more optimistic than ever The Goldilocks feeling (just right economic conditions) prevails on the financial markets. And this favourable situation has already existed for some time now. Market prices are setting record after record (the MSCI All Country World Index rose this year, measured in euros, by almost 6%), the economy is performing well in all regions and businesses were once again able to report good profit figures over the past quarter. It is not for nothing that investors are very optimistic. US consumers have in fact never been so positive about stock market expectations in the coming twelve months, and expect an average return of 13%, the highest expected return ever. Also in the US, the optimism among investment advisors has not been so positive since In the eurozone, the Sentix Investor Confidence Index rose from 29.7 to 34 points over the past month. Many Dutch households seem to think that this is the right moment to start investing: the number of investing Dutch households has increased this year by 14 percent - the biggest increase since the market rally at end of the 1990s (Source: Kantar TNS). It is important to remain alert Profit-taking follows disappointments Possibility that central banks will accelerate the withdrawal of funds Is everything hunky-dory? Is all this optimism justified? For the time being, it does seem that everything is hunky-dory. See, for example, a small selection of recent macroeconomic data: the final figure for the eurozone purchasing managers index was 56 points in October, slightly higher than a previous estimate of German factory orders rose by 1% in September, while a 1% decline was expected. Unemployment in the US has fallen to its lowest level since December And finally the European Commission (EC) has increased its growth expectations for the eurozone: growth of 2.2% is now expected for this year, while growth of 1.7% was still forecast in May. For next year the EC is now counting on growth of 2.1% (was 1.8%). How much better can it still become? In our opinion, a fair question, with as answer: it can get even better, but there are a number of things to watch out for. Important that Trump s tax plans are implemented The optimism among investors is largely associated with the stimulus plans of US President Trump. With the current high valuations (such as the price-earnings ratios), profit-taking is ready to pounce in response to disappointments. For the market sentiment it is therefore important that Trump s tax plans, including the tax cut for US companies, are quickly adopted by Congress. The postponement of tax reductions may mean that corporate earnings expectations have to be adjusted downwards somewhat. On the other hand, the implementation of the tax plans will give the economy an extra push. Incidentally, interest rates will then probably rise a little faster; partly because of this we expect more movement on the bond and equity markets. Low inflation expectations are a risk The current high valuations are to a great extent also related to the loose monetary policy. The central banks, by means of their policies, control the money supply in the economic system. This largely determines whether or not money flows to the financial markets. Since the outbreak of the financial crisis, central banks have pursued very accommodating policies, so that interest rates fell to extremely low levels and a large amount of capital became available. Because inflation rates currently still remain below the levels desired by the important central banks (around 2%), the Maandbericht Beleggen November

3 stimulation programmes are only being phased out very slowly. In the US, it also does not appear that this central bank policy is coming to an end under the new chairman of the US ce ntral bank, Jerome Powell. In our opinion, however, the inflation expectations that are currently factored into the prices are extremely low. Accelerating global economic growth is associated with higher interest rates than we are now seeing. The central banks stimulus policies disrupt the markets and push down interest rates. But the more positive the economic figures, the greater the likelihood that the central banks will accelerate the withdrawal of funds. Sources: Thomson Reuters Datastream, ING Investment Office, October 2017 We are partially taking profits on equities in the financial assets and information technology sectors We will invest less in the healthcare sector In spite of the above uncertainties, we believe there is still some room for manoeuvre in equity prices for the time being in view of the favourable economic conditions and the accommodating central bank policies. We are therefore maintaining a neutral weighting for the equity investment category. Nevertheless, we are diminishing the risk a little and making the sector allocation slightly more defensive by reducing the healthcare sector to an underweight position. The quarterly figures from companies in this sector were disappointing, political pressure is being exerted on prices, and hardly any positive influence on the profit figures is expected from a lot of new medicines, many of which are still under development. In addition, we will partially take profits on equities from the financials and information technology sectors, but will maintain their weighting at substantially overweight and slightly overweight respectively. Due to the lagging inflation expectations, interest rates are rising less quickly than expected. This is less favourable for banks, which can benefit from an interest rate increase. The equities of companies in the information technology sector are currently very highly valued. The figures for the third quarter of 2017 were again very positive and Apple, Tencent, Intel, STMicroelectronics and Qualcomm rose in value by more than 10% following the publication of the quarterly figures. In our view, this is a good time to take some profit and sell a small part. Sources: Thomson Reuters Datastream, ING Investment Office, October 2017 Maandbericht Beleggen November

4 These equities are relatively inexpensive Alternative for government bonds We are taking account of rising interest rates A stronger dollar could be unfavourable in the long term We are buying more equities from companies in the telecommunications sector With the proceeds of the profit-taking, we are financing an increase in the telecommunications services sector from underweight to neutral. These equities have low valuations and are thus relatively inexpensive. Performance in this sector has been rather disappointing of late, partly due to a lot of price competition. This competitive pressure appears to have declined somewhat. Furthermore, economic growth in Europe and the US is positive for spending on digital television, mobile telephony and data subscriptions. Real chance of real estate price recovery With capital market interest rates not rising as quickly as expected, opportunities arise for listed real estate equities, because when the market interest rate on (government) bonds is relatively low, real estate becomes an alternative source of income. Moreover, the average valuation levels of listed real estate have fallen, while economic growth in the most important regions remains stable. That is why we consider that there is a real chance of price recovery in the coming months and are maintaining our overweight for the real estate investment category. High-yield bonds under pressure We maintain our underweight of the bond category and take account of the possible negative effects of rising interest rates. Companies that run a tight ship, with a high level of financing (debt) in proportion to their profit and value, are vulnerable in the face of higher interest rates. This, in our view, has increased the risks of high-yield bonds. We are therefore maintaining this bond category at neutral. Within bonds, we previously already further limited the sensitivity to the negative effects of rising interest rates by shortening the average remaining maturity of the loans. In addition, we are maintaining an underweight of government bonds against an overweight of corporate bonds in order to increase the yield on bonds. Chinese trade figures remain positive The Chinese economy continues to perform well, although we are also seeing a slight upward pressure on inflation. The domestic economy is running smoothly, confidence is high and Chinese consumers continue to spend (as an illustration: on Singles Day the Chinese online marketplace Alibaba was easily able to break last year s turnover record by USD 25 billion). Chinese exports also grew again in October, by 6.9% (in dollars). The Chinese economy plays an important role in the performance of the emerging markets as a whole. In the long term, a stronger dollar could be unfavourable for the emerging markets, but for the time being the region remains overweight within our regional allocation. Maandbericht Beleggen November

5 Want to know more? See ing.nl/beursnieuws Disclaimer This investment recommendation was prepared and issued (in Dutch) by ING Investment Office, part of ING Bank N.V., for the first time on 15 November 2017, p.m. For the preparation of this investment recommendation, use was made of the following substantive sources of information: S&P Capital IQ, Bloomberg, CreditSights, Oddo Securities, Standard & Poor s, Thomson Reuters Datastream, Moody s, Fitch, UBS Neo, Reuters Metastock and/or Sustainalytics. This investment recommendation was based on the following accounting principles, methods and assumptions: price/earnings ratio, price/book value ratio and/or net asset value (NAV). No protected models were used for this investment recommendation. A description of the ING policy regarding information barriers and conflicts of interest can be found here. Unless otherwise stated, ING Bank N.V. will not update the investment recommendation. Developments that have occu rred after the preparation of this investment recommendation may affect the accuracy of the assumptions on which this investment recommendation is based. Investment recommendations are generally revised two to four times a year. This investment recommendation does not constitute individual investment advice, but only a general recommendation on which investors can also base their investment decisions and does not constitute an invitation to enter into any contract or commitment whatsoever. This investment recommendation is based on assumptions and does not represent any guarantee for a particular development or result. No rights can be derived from this investment recommendation. Decisions based on this investment recommendation are for your own account and risk. Neither ING Bank N.V., nor ING Groep N.V., nor any other legal entity belonging to the ING Group, accepts liability for any damage to any extent whatsoever, arising from the use of the above investment recommendation or the information contained the rein. Investing entails risks. You could lose all or part of your initial investment. The value of your investment may fluctuate. Past performance is no guarantee of future results. ING Bank N.V. is not registered as a broker dealer and investment advisor as referred to in the US Securities Exchange Act of 1934, respectively, the US Investment Advisers Act of 1940, as amended from time to time, nor within the meaning of other applicable legislation and regulations of the individual states of the United States of America (hereinafter jointly referred to as: US investment law ). This investment recommendation is not addressed to and not intended for US Persons within the meaning of US investment law. Copies of this may not be sent or brought to the United States of America or provided to US Persons. ING Bank N.V. has its registered office in Amsterdam, Commercial Register no , and is supervised by the Netherlands Authority for the Financial Markets (Stichting Autoriteit Financiële Markten) ( AFM ). ING Bank N.V. is part of ING Groep N.V. All rights reserved. This investment recommendation may not be reproduced, copied, published, stored, modified or used in any form, online or offline, without the prior written consent of ING Bank N.V ING Bank N.V., Amsterdam.