ING Investment Office Publication date: 22 May 2018, 12:50 p.m. Monthly Investment Outlook May 2018 Optimism returns But not everywhere Asset allocation April May 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 The same policy in outline, minor adjustments The nervousness that prevailed on the financial markets last month has been less pronounced in recent weeks. Following the sharp fall in the price of the major IT equities from mid-march onwards, a recovery followed in April, which continued in the first weeks of May. Partly as a result of this, and of a somewhat less tense relationship between the US and China in their trade dispute, stock market sentiment improved. In addition, economic growth expectations have not deteriorated significantly, despite somewhat less-than-expected macroeconomic figures from the US and Europe. US companies in particular exceeded analysts earnings growth expectations for the first quarter and spoke positively about the coming quarters. This is especially the case for oil-related equities, which benefit from the rising oil price. Following a period in which the US dollar became weaker and weaker, we are now seeing a slight correction in this movement. However, we do not expect this correction to last long, and we still expect the dollar to be weaker at the end of the year than it is now. Highlights Calm on the financial markets appears to be returning Decreased tensions in the trade conflict between the US and China No evidence of a significant slowdown in economic growth Good quarterly results for US companies support sentiment Stronger dollar bears down on emerging market equities and bonds...... and that offers opportunities for EMD, in which we are going to invest more at the expense of investment grade corporate bonds Within equities we are reducing financials and increasing healthcare We are keeping equities neutral, real estate overweight and bonds underweight. Fixed income Sovereign bonds Investment grade corporate bonds High-yield bonds Emerging markets
Emerging markets affected by strong US dollar and higher American interest rates. We consider market response to be exaggerated We are going to invest more in EMD Emerging market equities and bonds in particular have been affected in recent weeks by the strengthening of the US dollar and slightly higher US bond yields. We consider this response to be exaggerated and see the fall in the price of emerging market debt (EMD) as an attractive opportunity to increase our tactical weighting of EMD from neutral to overweight. This is at the expense of the weighting of high-quality corporate bonds ( investment grade credits, IGC), whose overweight we are reducing slightly. We are also reducing the tactical overweight of the financials equity sector and increasing the weighting of equities in the healthcare sector from underweight to neutral. We are maintaining our allocation across asset classes (tactical asset allocation) with a neutral weighting of equities and an overweight of real estate against an underweight of fixedincome securities. Will the US withdrawal from the Iran agreement come to nothing? It will undoubtedly form part of President Trump s political jostling, but the fact is that he often says or tweets something, only to water it down a little later. For example, it appears that tensions between the US and China in the area of mutual trade have eased. Although no firm agreement has been reached yet, this is good for the outlook of the global economy. However, it still remains to be seen whether the withdrawal of the US from the nuclear agreement with Iran will come to nothing. Investors have so far reacted fairly calmly to developments in the Middle East. The effects are best seen in the raw materials market, where the price of a barrel of crude oil has risen to its highest level in almost four years. Oil price (Brent crude) in US dollars Inflation in the eurozone still low, despite a tighter labour market We do not expect the ECB to raise interest rates in the short term. In the macroeconomic field, we still see few reasons for concern. Following the fall of the global purchasing managers index from 54.8 to 53.3 in March, it recovered to 53.8 points in April. This points to an upturn in economic growth. At the same time, despite the increasingly tight labour market, significant downward pressure on inflation remains. This applies to the US, but especially to the eurozone up until now. Inflation in the eurozone remained stable at 1.2% (year-on-year) in April. Core inflation, i.e. inflation excluding strongly fluctuating energy and food prices, was only 0.7%. Both rates are still well below the European Central Bank (ECB) target level of close to, but slightly below 2%. In the short term we therefore do not expect the ECB to pursue a strict tightening (inhibiting money growth) policy, such as an interest rate increase. US inflation figures, at 2.5% (year-on-year) and 2.1% for core inflation, are at a level where we expect the Federal Reserve Bank (the Fed ) to raise policy rates further. This year we expect three small interest rate hikes of 0.25%. Global purchasing managers index (J.P.Morgan composite PMI) Maandbericht Beleggen May 2018 2
Rising US interest rates due to higher inflation and more expensive oil Dollar strengthens The expectation of higher interest rates in the US has contributed to a slight strengthening of the dollar in recent weeks, after weakening since the beginning of this year. This correction was reinforced by the reversal by investors of speculative positions directed towards a weaker US dollar. At the same time, yields on US government bonds rebounded somewhat in response to the US inflation figures and the rising oil price. Currently, the two-year yield is at its highest level for ten years and the US 10-year yield is above 3.0%. We expect the US 10-year yield to still rise a little further by the end of this year. 10-year yield US government bonds EMD price fall unjustified Financials disappoint Fall in interest rates temporary Emerging markets less dependent upon dollar loans Following the sharp falls in EMD prices in recent weeks, we find this bond category more attractive. In our opinion, the fear of a capital outflow as a result of the stronger dollar and rising US interest rates is not entirely justified. We have experienced this fear before. In 2013, the sentiment with respect to emerging market investments was strongly negatively affected by the so-called Taper Tantrum : investors fears of a rapid scaling back of the Fed s stimulus policies. This tantrum due to the scaling back of central bank stimulation ( tapering ) was the result of statements by the then Fed president Ben Bernanke that the Fed would stop the mass buyback of loans. The dollar strengthened and emerging markets were hit hard, both in the real economy and on the stock markets. Since then, many emerging markets have implemented reforms and, in many cases, their fundamental economic and financial positions have improved enormously. In some cases, current account deficits have narrowed significantly or even turned into surpluses. This means that the dependence on external financing, via dollar loans for example, has decreased, also together with the risk of capital outflow from the emerging markets (with all the negative consequences that entails). This does not mean that there are no problems at all in the emerging markets. Nevertheless, problem countries such as Venezuela, Argentina and Turkey are much more isolated cases and we do not regard them as leading indicators for the entire region. Healthcare sector: from underweight to neutral weighting We do not anticipate any rapid change in this development in the short term, not least because the volatility of the financial markets has declined sharply since the beginning of the second quarter, which will reduce trade income. On the other hand, we have become slightly more positive about equities in the healthcare sector. The underweight that we have employed since November last year has worked out well so far. We no longer believe it is appropriate, however. In spite of the strong political pressure, we see rather fewer risks of increased price pressure with medicines. The likelihood of a negative scenario is, in our opinion, already sufficiently priced in. Furthermore, we are slowly but surely seeing more consolidation in the sector, as evidenced by the increasing merger and acquisition activities. Finally, with reference to the first-quarter figures, we see that analysts have increased their earnings growth expectations for the coming twelve months. We no longer believe an underweighting of the sector to be appropriate at the moment. We have therefore increased the sector weighting from underweight to neutral. Short duration still maintained Following a short period of increasing investor uncertainty - resulting in a flight to safe havens - we are eventually expecting higher yields on US and eurozone government bonds towards the end of Maandbericht Beleggen May 2018 3
the year. With the prospect of higher yields on government bonds, we are maintaining the tactical underweight of this category and are also employing a relatively short duration (low interest rate sensitivity). As already mentioned, within fixed-income securities, our preference at the moment is for EMD. Sharp recovery of listed real estate Overweight maintained for real estate Following a sharp price recovery in recent weeks, listed real estate equities are back at the level they were at the start of the year. However, despite this price recovery, a large proportion of the globally listed real estate equities are still significantly below their net asset value (appraised value of the assets). At the same time, we see no reason for a sharp rise in real interest rates (interest rates minus inflation). We are therefore maintaining the overweight of this asset class in our tactical asset allocation. Index global real estate Fewer tensions between the US and China Neutral weighting of equities remains The expectation that we expressed in our previous Monthly Investment Outlook has been realised. The trade dispute between the US and China has not yet escalated, and the threat of a sharp slowdown in economic growth has therefore been averted. In response, equity prices have risen. However, at current levels there is little evidence of accelerating earnings growth, while equity valuations are not low. We are therefore maintaining the asset allocation at the level of main investment categories with a neutral weighting for equities, an underweight in bonds and an overweight in real estate. With the regional allocation within equities we continue to have a slight preference for emerging markets and for Japan. US equities remain underweight. Maandbericht Beleggen May 2018 4
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 16 My 2018, 2.30 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 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. 33031431, 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. 2017 ING Bank N.V., Amsterdam.