Nervousness is increasing We remain calm

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1 ING Investment Office Publication date: 18 April 2018, 12:40 p.m. Monthly Investment Outlook April 2018 Nervousness is increasing We remain calm Asset allocation March April 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 No changes in our tactical asset allocation Fears of an escalation of the trade dispute between the US and China have been hanging over the markets like a dark cloud during the past month. Investors became nervous with the announcement of additional import duties on Chinese goods by President Trump and immediate subsequent countermeasures by China. The sentiment was also subdued by the price correction of major IT equities following the controversy about leaked Facebook user profiles. In the meantime, more and more macroeconomic figures have fallen short of analysts expectations and in many regions the peak in the economic cycle seems to have been reached or already passed. Uncertainty about economic growth prospects led to rapid swings in market sentiment and sharp price movements on the financial markets. Our outlook has not changed, however. Economic growth will continue for the time being and interest rates will eventually rise further. We are therefore maintaining our tactical asset allocation and the neutral weighting of equities in the various categories. We are also continuing to take account of increased price volatility on the financial markets in the coming period. Highlights Investors nervousness leads to lower equity prices and lower yields on government bonds. The trade dispute between the US and China is also subduing market sentiment as well as the slightly disappointing macroeconomic figures. We expect continued economic growth and higher interest rates. Political uncertainty and the peaking economic cycle are causing exchange rate fluctuations. We are sticking to a neutral weighting of equities and an underweight in bonds. Real estate benefits from low real interest rates and remains overweight.

2 Equity prices under pressure and lower yields on government bonds Is there a Goldilocks scenario? Recurring fears of trade war Just when we thought that the concerns about a global trade war were behind us, oil is being thrown on the fire by the White House. An extension of the US import duties on even more Chinese goods has been reciprocated by China with the announcement of import duties on US goods and has now degenerated into a series of mutual threats to erect trade barriers. Investors reacted very nervously to the threatened trade war because it could damage economic growth in the world s two largest economies. Equity prices consequently came under pressure and yields on government bonds fell as a result of the flight to safe havens. Have we reached the peak? Looking at the figures from the eurozone, it appears that we have already reached the highest point in the economic cycle here. Thus, for example, a reliable leading indicator, the eurozone purchasing managers index, fell from 57.1 to 55.2 points in March. This is the second decline in a row. The German business confidence index, the Ifo index, also fell for the second consecutive month in March. Both indicators still point to increasing economic growth, but the momentum in the eurozone is clearly decreasing. Figures from the eurozone are increasingly disappointing and Citigroup s Economic Surprise Index for the eurozone has now fallen to its lowest levels since June In the US, the picture is more mixed. Orders for durable goods increased by 3.1% in February compared to the previous month. That is a lot more than the plus 1.6% that had been expected. On the other hand, only 103,000 new jobs were created in March, far fewer than the 185,000 expected, and the purchasing managers index for the services sector fell from 59.5 to 58.8 points. We expect growth in the US to peak in the current quarter and gradually diminish. It is therefore not surprising that investors are becoming more sensitive to political tensions and their possible economic impact. Non-farm payrolls (x 1000) March 2018 Facebook data scandal leaves its marks Government bonds underweight remains Information technology sector under pressure Following years of outperformance, the information technology equity sector had a hard time during the past month. The immediate reason for the correction is the data leak scandal at Facebook, as a result of which investors increasingly question its growth prospects should stricter regulations be imposed on this IT colossus. In addition, President Trump expressed his dissatisfaction with internet giant Amazon with his Twitter messages, thereby provoking further profit-taking. Other popular IT equities, such as Apple, Netflix and Google (Alphabet), were pulled down in its wake. Although we are aware of possible setbacks for the sector in the short term, we are still maintaining our slightly overweight position for the information technology sector in the tactical asset allocation. It is one of the few sectors that we expect will be able to meet the (high) profit growth expectations for a longer period of time. Risk-aversion leads to lower yields As expected, increasing investor uncertainty has led to increased demand for safe havens such as government bonds. Not only did German interest rates fall as a result, but there was particularly strong demand for government bonds from the so-called periphery of the eurozone, such as from Italy and Spain. In particular, Italian government bond prices, which account for almost 25% of the European sovereign bond market, rose - resulting in lower market interest rates. We expect this to be a temporary movement and assume that bond yields will rise by the end of the year. Upward Maandbericht Beleggen April

3 pressure on inflation, partly due to tightening labour markets in the US and eurozone, will increase further if economic growth continues at current levels. Our baseline scenario therefore continues to be that the most important central banks will continue to gradually cut off the flow of funds and pursue less accommodating policies. With the prospect of higher yields on government bonds, we are maintaining the tactical underweight of this category and employing a relatively short duration (low interest rate sensitivity). Within fixed-income securities, our preference is for high-quality corporate bonds (investment grade credits), a large proportion of which are bonds whose interest rate is in line with movements in market interest rates, known as floaters. 10 year yield Italian government bonds (%) Listed real estate recovers Real interest rates fall As we already wrote last month, the performance of listed real estate equities (REITs) has been disappointing so far this year. Particularly the fear of sharply rising interest rates and a weaker dollar led to lower prices. However, due to the fall in interest rates in the past month, while inflation expectations hardly changed, real interest rates have also fallen (nominal interest rates minus inflation). As a result, and because of the current discount in relation to the appraised value of the real estate, listed real estate has recovered substantially. It was one of the best-performing asset classes in recent weeks - thereby offsetting some of the earlier losses. We expect this movement to continue for a while and are therefore maintaining our tactical overweight. Global real estate index (FTSE EPRA/NAREIT in EUR) Equities still not cheap after price fall Plenty of movement; asset allocation unchanged Despite the increased uncertainty in the short term, we have decided not to make any changes to our tactical asset allocation this month. With respect to the trade dispute between the US and China, we believe that things are not quite as bad as they seem. The downside risks therefore appear to be limited at the time of writing. On the other hand, the limited fall in the price of global equities has not yet led to very low valuations. Regional preference for emerging markets and Japan This means that we are employing a neutral equity weighting at the level of the main asset classes, an underweight in bonds and that we are leaving real estate underweight. Within the regional allocation of equities, we continue to have a slight preference for equities from emerging markets and Japan. US equities remain underweight. At sector level, we are enthusiastic about equities from Maandbericht Beleggen April

4 Our favourite sectors are IT, financials and energy the IT, energy and financial sectors. Following a correction last month in response to lower interest rates, financial corporations can benefit from higher interest rates in the coming months. We are less enthusiastic about equities from the materials, healthcare and consumer staples sectors. 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 11 April 2018, a.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 occurred 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 therein. 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. Maandbericht Beleggen April

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