ING Investment Office Publication date: 13 June 2018, 1.15 p.m. Monthly Investment Outlook June 2018 Market turmoil prevails, the economy continues to grow May June Asset allocation - + Market turmoil prevails, the economy continues to grow 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 The news is dominated by news flashes, each of which could create strong turbulence on the financial markets. Nevertheless, reports of, for example, trade wars, the difficult government formation in Italy, Brexit or the US withdrawal from the agreement with Iran only temporarily set the stock markets in motion. Given the economic figures, there is no direct reason to become immediately negative about the state of the global economy. The US economy continues to grow, the economy in Europe is perhaps less buoyant, but there is no reason for us to be concerned about this either. In our opinion, it is therefore right that investors should be less guided by the issues of the day, and rather adopt a wait-and-see attitude where the news is concerned. We see a slight decline in the global economic momentum. This means that we remain alert to signals which indicate that short-term movements will have an impact on long-term trends. We are making a number of changes to the allocation of the investment strategies. We will invest less in the telecommunications and utilities sectors, which we consider to be defensive. On the other hand, we will invest more in the materials sector. Companies in this sector can benefit from the increasing demand for raw materials. Highlights A lot of news, but financial markets remain calm Tensions surrounding Trump s America first policy have as yet not had much effect. Economic growth now seems to be levelling off, especially in Europe Tensions surrounding Italian elections are not leading to escalation ECB is not yet in any hurry to phase out its stimulus programme Within equities, we are increasing the materials sector at the expense of the telecommunications and utilities sectors. We are keeping equities neutral, real estate overweight and bonds underweight.
Investors keep a cool head Anyone following the news would think that investors have enough things to worry about. We do not see this reflected in the figures, however. During the past month, we saw that global stock markets paid little attention to political tensions in Italy, trade wars or Brexit. Equities therefore continue April s recovery. The United States had the strongest performance of any region in the past month (measured in euros). Emerging markets, on the other hand, remained weak. We also saw a sharp fall in German interest rates, but due to the higher interest rates in southern euro countries such as Italy, we still saw a negative return on the broad European government bond index. Real estate continued to recover, not least due to the strengthening of the dollar. Differences in economic momentum Global purchasing managers indices (PMIs) indicate that the economic momentum seems to be weakening somewhat. For many regions, the peak of economic growth now seems to be behind us. Worldwide, the PMI increased by 0.1 point last month, but thus remained well below the February peak of 54.8. A weakness was particularly noticeable in Europe with a decrease from 55.1 in April to 54.1 in May, the lowest levels since November 2016. A figure of over 50 indicates that there is growth, but the lower levels confirm our view that the peak has been reached and that the growth is assuming a more trend-based character, such that it remains positive but will no longer rise sharply. On the other hand, the US purchasing managers index rose to 56.6 points in May, its highest level for more than three years. Trade war mainly affects sentiment Unemployment in the US at its lowest level since 1969 No escalation of trade war apparent The policy of US President Donald Trump, which aims to put America first, is creating tensions in the area of international trade. The recent meeting of the G7, the group of seven leading industrial states and the European Union, showed that the US is no longer on the same wavelength as its main Western allies. The import duties on aluminium and steel did not go down well in Canada and the European Union. However, these measures have only a limited effect on the global economic scale. The scope of the measures is relatively small compared to global trade. It is thus also sooner an indication that cooperation between the US and its traditional allies is under pressure and has more influence on sentiment than on the hard economic figures for the time being.. Good figures from the US Unemployment in the US fell for the second month in a row to 3.8% in May its lowest level since 1969. At the same time, wages in the US are also slowly but surely rising, up 2.8% on a year ago. This trend is likely to continue as the labour market is becoming increasingly tight. US companies indicate that they are having great difficulty in finding qualified personnel. As a result, the number of vacancies now exceeds the number of job-seekers, leading to a strong bargaining position for employees asking for higher salaries. Low unemployment and high wage pressures may lead to higher inflation in the US, so that the central bank (the Fed) will raise interest rates further and thus the stimulus from monetary policy will diminish. On the other hand, the US government is pursuing an accommodating fiscal policy, including tax cuts, which will allow the US economy to absorb the central bank s interest rate increases in the short term. Maandbericht Beleggen June 2018 2
Slight unrest in the eurozone Italy causes volatility The Italian elections and the subsequent formation of a new government have caused some unrest on the European stock markets in recent weeks. This was clearly reflected in the movement in Italian government bond yields, with an increase in the 10-year yield from around 2% to 3%. However, the situation in Europe is now much better than it was at the end of 2009, when there was considerable anxiety that the eurozone would fall apart. That risk is now almost non-existent, the situation in Italy has improved to such an extent that, in our opinion, this will no longer threaten the eurozone. Thus, for example, a large proportion of Italian government bonds are held by the Italians themselves. Only 36% is held by foreign investors, which significantly reduces the risk of large interest rate fluctuations. In addition, the European Central Bank (ECB) is still buying bonds, which also lowers interest rates. Finally, although the new government is pursuing a euro-critical course, the new Finance Minister has confirmed that Italy wants to remain in the euro. Emerging markets increasingly less comparable ECB does not yet appear to be in any hurry to scale down the stimulus In Europe, the ECB does not yet seem to be in any hurry to scale down its stimulus measures. The target of 2% inflation has not yet been achieved and, as previously mentioned, the figures do not give any direct reason to expect that the economy will start growing strongly again in the short term. The signals sent out by the ECB last week give us reason to expect that it will want to end the purchase of bonds this year. We are only expecting an increase in policy rates from the second half of next year. Emerging markets It is becoming increasingly clear that emerging markets are less and less comparable. We therefore see major differences between the countries included within this group. An important indicator is the current account deficit: are countries able to comply with their immediate obligations? Countries with the largest current account deficits are seeing their interest rates rise. However, a number of large countries including China and Russia are not affected. Furthermore, in recent years, many countries have increasingly issued loans in local currencies rather than in dollars and have consequently become less sensitive to exchange rate effects. Maandbericht Beleggen June 2018 3
We expect that economic growth in the emerging markets will weaken slightly in the second half of 2018, but will remain positive and well above the growth in developed markets. We are therefore leaving this region s overweight intact. Rising US interest rates due to higher inflation and more expensive oil Dollar weakens slightly In recent weeks, the exchange rate of the dollar has weakened somewhat after the expectation of higher interest rates in the US and the concerns about Italy in the weeks leading up to this had actually led to a stronger dollar (and therefore a weaker euro). The yields on US government bonds rebounded somewhat in response to the US inflation figures and the rising oil price. We expect the US 10-year yield to still rise a little further by the end of this year. We will invest less in the telecommunications and utilities sectors We are investing more in materials Fall in interest rates temporary Telecom and utility companies lag behind The equity prices of telecom and utility companies have long lagged behind the average price performance of global equities. Since the start of the year, equities from both sectors have been well below the MSCI World Index. With unchanging growth expectations, the valuation based on the expected profit for this year of European telecom companies fell to 13.5x, a long-term low. In the US, on the other hand, the valuation increased slightly. Consolidation and new CEOs with fresh plans could create positive price momentum in the coming period, but the underlying challenges for this sector have remained unchanged: low growth, high investments, high debt positions. We are therefore going to invest less in equities from the telecommunications sector. Similar challenges apply for the equities of utilities. We also expect stronger government interference and higher interest rates to dampen the sector s price performance. That is why we are also reducing the weighting of utilities from neutral to underweight. Materials make up lost ground In a positive market, the materials sector outperformed the benchmark by approximately 2%, measured in euros, in the previous month. Over the year as a whole, the arrears were reduced to approximately 1%. Profit expectations for the sector remained fairly stable thanks to the relative calm. While the markets are getting used to the trade-restricting actions of the White House to some extent, a number of these initiatives continue to dominate the sentiment while their implementation is ongoing. This makes markets more volatile. This also applies to the price movements of mining companies that react strongly to important news. Nevertheless, we expect that the relatively robust global economic growth will lead to an upturn in the demand for raw materials, thereby pushing up prices. We have therefore decided to invest more in companies that are active in the materials sector. Short duration still maintained Following a short period of increasing geopolitical uncertainty among investors resulting in a flight to safe havens we are eventually expecting higher yields on US and eurozone government bonds towards the end of 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). Maandbericht Beleggen June 2018 4
Sharp recovery of listed real estate Overweight maintained for real estate Following a sharp price recovery in recent months, listed real estate equities have risen above 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). At the same time, the real estate category offers some protection against rising inflation because many rental contracts include a variable for the level of inflation. This will enable real estate companies to raise their prices in line with inflation. We are therefore maintaining the overweight of this asset class in our tactical asset allocation. Fewer tensions between the US and China Neutral weighting of equities remains As already stated, despite the difficult negotiations, the trade dispute between the US and China has not yet escalated. The threat of a sharp slowdown in economic growth has therefore been averted. In response to this, equity prices rose. However, at current levels there is little evidence of accelerating earnings growth, while equity valuations will be constrained by higher interest rates. 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 listed real estate. With the regional allocation within equities we continue to have a slight preference for emerging markets and for Japan. Due to their relatively high valuation, US equities remain underweight. Maandbericht Beleggen June 2018 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 19 June 2018, 11:11 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 tha t 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.