ING Investment Office Publication date: 13 September 2018 12:30 p.m. Monthly Investment Outlook September 2018 Increasing uncertainty leads to profit-taking August September Asset allocation - + We are reducing the risk and taking some profit Equities Real estate Commodities Alternatives Fixed income Geographic allocation iti 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 bonds High-yield bonds Emerging markets This month, we are lowering the relative weight of marketable securities in our tactical asset allocation. We are doing so by reducing the weighting of equities to neutral in favour of fixed-income securities, which are now also given a neutral weighting. We are thus reducing the risk in the investment strategies and partially taking profit on equities. Global equity markets have performed well in recent months. This is despite increased uncertainties as a result of mounting trade tensions between the US and China and concerns about emerging markets. The price losses of emerging market investments were more than compensated by the price gains on US equities. This year s return on global equities (in euros) is now approaching our forecast for the whole of 2018. Against the background of increasing (geo)political tensions and gradually less accommodating policies by the central banks, we therefore consider it appropriate to remove some of the risk. The allocation by region and sector remains unchanged this month. Highlights: Equity weighting reduced to neutral Despite considerable regional differences, equity returns are approaching our 2018 forecast for the full year Concerns about the trade war and about emerging markets continue to weigh down on the market...... but underlying growth remains strong Increasing uncertainty leads to profit-taking A drop in the prices of emerging market equities and bonds makes valuation attractive We are keeping the regional and sectoral allocation unchanged.
Risks for emerging markets not yet abated We expect US growth to slow down slightly Concerns about trade war and about the emerging markets There is still the threat that the US will extend the additional duties on imported goods. President Trump s threatening language of imposing even more import duties on Chinese goods has dominated sentiment on the global financial markets for months already. This has not changed during the past month and we also do not see this threat diminishing in the short term. In addition, the negative sentiment around Turkey and Argentina has spread to a number of other emerging markets. The unexpected contraction of the South African economy in the second quarter weighed even more on the sentiment. This not only put further pressure on the South African rand, but also on the exchange rates of other emerging markets currencies, which increases the risk of a selfreinforcing negative spiral in emerging markets. We do not expect that this will happen, but at the same time we are not closing our eyes to possible negative scenarios. In the run-up to the US byelections on 6 November, markets are expected to remain volatile. Underlying global growth remains strong On the basis of the sharp price falls in recent weeks in some regions, one would almost think that economic growth is showing a strong deceleration. That is only partly true. In Turkey and South Africa, for example, economic growth did indeed slow down sharply this year, as a result of policy failures on the part of the government and central banks. In the eurozone, too, we saw a slowdown in the first half of this year to a more normal growth rate, but that was not surprising, following last year s particularly high growth rates. In the summer months, the growth rate in the eurozone has stabilised somewhat; in the US, it has picked up further, as can be seen from the indicators. For example, last month the purchasing managers index of US manufacturing activity rose to its highest level for 14 years, the purchasing managers index for the US services sector rebounded and the US SME confidence index is at its highest ever level. Meanwhile, the scarcity on the US labour market is increasing further and we are seeing more upward pressure on wages. It can hardly get much better. We therefore expect US growth to moderate slightly in the coming quarters, but to remain high. We will no longer see the second quarter s 4.2% (annualised) growth of gross domestic product (GDP) for the time being. This does not mean that a recession is imminent, however. US SME confidence index at all-time high Vertrouwensindex MKB VS 110 108.8 105 100 95 90 85 80 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 NFIB SMALL BUSINESS OPTIMISM INDEX - NORMALIZED : United States Source: Thomson Reuters Datastream, ING Investment Office Source: Thomson Reuters Metastock, 12 September 2018 Maandbericht Beleggen September 2018 2
We assume that the Chinese leadership is sufficiently able to control the economy Depreciating emerging market currencies may become a self-fulfilling prophecy China: impact of trade measures hardly visible Although there is a real threat of more trade-restrictive measures by the US, the impact on the Chinese economy of the import duties implemented so far is very limited. In August, Chinese exports (in dollars) increased by 9.8% compared to last year, imports by 20%. This points to strong growth of the Chinese economy in the third quarter, driven mainly (and increasingly) by the growth of domestic consumption. Therefore, we still assume growth of 6.7% for the Chinese economy in both 2018 and 2019. As in 2009, although to a lesser extent, the Chinese government is pursuing an accommodating policy with additional investments. The stimulus is reinforced by the Chinese central bank s more flexible monetary policy. This puts an end to the policy that since 2016 has been mainly directed towards reducing debts. For the time being, we assume that as long as no major capital flight arises, the Chinese government will be able to control growth and steer it in the right direction. There is currently no question of a capital flight, despite the weaker yuan (and contrary to what we saw in the summer of 2015). The emerging markets do not exist For investors it is often difficult to distinguish between different emerging markets. There is, of course, a tendency to lump all emerging markets together. Consequently, the problems in Turkey and Argentina are also projected on other emerging markets without making any distinction between them. Countries with current account surpluses are penalised as harshly as countries with deficits. Falling exchange rates can thus become a self-fulfilling prophecy, with rising inflation and rising interest rates as a result. Particularly poorly managed countries with relatively large foreign currency debt levels can then run into problems. In many cases, however, we consider the response of the financial markets to be exaggerated and the decreases in the prices of equities, (government) bonds, etc. are disproportionate to a country s fundamentals. We also believe that the impact of trade-restrictive measures on the economic growth of emerging markets is less important than, for example, growth in developed markets, fiscal policy and oil price developments. Increasing uncertainty leads to profit-taking Despite all the uncertainty, the class of equities with a global spread, supported by price gains in the US, has shown a positive return in recent months. As a result, the return on equities this year up until now (5% in euros) is approaching our forecast for the whole of 2018 (+6%). The coming weeks will be dominated by the busy political agendas in both the US (elections) and Europe (including the Brexit negotiations). This is expected to lead to greater volatility on the financial markets and a more sideways movement on the equity markets. A neutral weighting is appropriate here. Despite the generally positive economic developments, we have therefore decided to reduce the equity risk and take a profit on the overweight of equities we have maintained since July. Yields in core eurozone countries may pick up again No changes in regional and sector allocation We are keeping the regional and sector allocation unchanged this month. We are maintaining an underweight of US equities and an overweight of both Japanese and emerging market equities. Valuations and profit growth expectations are our main arguments in this respect. Emerging market equities have been hit hard by growing concerns about contagion and are now showing a loss of almost 8% (in euros) this year. This is therefore the worst-performing region. In January, emerging market equities still stood at a profit of 7%. We expect emerging market equities to recover somewhat in the coming months. US equities have so far achieved a return of almost 13% in 2018; here we expect there to be some profit-taking. Within the equity sectors, we are maintaining the overweight of equities from the energy, information technology and financials sectors. For the latter sector, the positive development of Italy s budgetary plans is particularly supportive. Yields on Italian government bonds are expected to fall slightly again, while yields on government bonds from the core eurozone countries (such as Germany and the Netherlands) could rebound somewhat in response to positive economic developments. Maandbericht Beleggen September 2018 3
Indexed returns regional indices in 2018 Aandelenrendement per regio MSCI indices, total return netto, in euro,vanaf 01/01/2018 tot 12/09/2018 15% 13.2 10% 5% 0% -0.3-1.5-2.7-5% -10% Jan Feb Mar Apr May Jun Jul Aug Sep 2018 MSCI USA MSCI JAPAN MSCI EUROPE MSCI PACIFIC EX JAPAN MSCI Emerging Markets Source: Thomson Reuters Datastream, ING Investment Office Source: Thomson Reuters Metastock, 12 September 2018-8.5 Risk/return ratio EMD has become very attractive EMD punished too harshly We are reinvesting the funds released from the sale of the equities in fixed-income securities. Within fixed-income securities, we are sticking to our allocation with an underweight in government bonds and an overweight in emerging markets debt (EMD) and corporate bonds being maintained. We are maintaining an overweight in high-yield corporate bonds because we consider the current risk premium to be too low in relation to the fundamental risks (creditworthiness and relatively high debt position). We find the fall in the price of EMD, both in hard and local currencies, to be exaggerated and the risk/return ratio very attractive. The overweight of EMD remains therefore. Within government bonds, we have a preference for short-term bonds in order to mitigate interest-rate sensitivity. Price losses consequently remain limited in the event of rising market interest rates. Within corporate bonds, we are for example investing in floaters to offset the negative effects of higher interest rates. With floaters, the interest coupon moves with the (short-term) interest rate. Maandbericht Beleggen September 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 13 September 2018, 12.30 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.