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Investment Outlook 2017 Time to switch Interest rates appear to be structurally increasing. Equities are our favourite asset class. Following the central banks, it is now the task of politicians to boost the economy. Technology and smart software also have a decisive influence in many sectors in the year 2017. ‘Sustainable’ and ‘online’ remain important themes. Index 4 5 Introduction by Bob Homan “Sitting idly by is no longer an option” Macroeconomics and market developments The ball is in the politicians’ court 8 1 15 20 ING investment strategies policy Higher interest rates affect all strategies Analysis of asset classes Positive but moderate expected returns Technical analysis Rising long-term trend continues in 2017 Sustainable investment Limiting CO2 emissions high on the agenda since climate agreement Sectors 22 Consumer discretionary Consumer staples Financials 33 Industrials 31 Real estate 36 34 Energy Healthcare 40 39 37 Information technology Materials 29 27 Utilities 26 24 Telecommunication services Commodities Bob Homan Bob Homan is the face of the bank in the investment field. He is an economist and started his career at Postbank. He subsequently worked for several asset management companies. In 2003 he became CIO at WestlandUtrecht Effectenbank and has headed the ING Investment Office since 2008. In 2016, he won a ‘Golden Bull’ audience award as ‘Best investment expert’. Also in 2017, we expect only moderate returns “Sitting idly by is no longer an option” Welcome to our 2017 Investment Outlook. It will hopefully offer you some guidance in these turbulent times. In 2017 it will also be necessary to keep looking at the big picture. And to occasionally have nerves of steel. A number of important elections will soon be taking place, also with the prospect of exciting times for the euro again. Fortunately, as we have seen the Brexit referendum and the election of Trump, the financial markets do not always respond as badly as expected. Investors appeared to recover fairly quickly from the shock. That is an argument for sticking to your vision and your investment plan. At the same time, we should not remain fixated with previous insights. Wherever necessary, we will therefore adjust our policies – also in 2017. What can we expect? Sitting idly by is no longer an option The economy is still improving in our view, but this is accompanied by higher interest rates and steeply priced asset classes. Compared to long-term averages, this results in low return expectations for the various classes. Just like last year. 4 Precisely under such tense market conditions it strikes us that new facts are reflected in the prices within a day: investors react quickly to the latest developments. Sitting still, waiting for the outcome of, for example, referendums or elections is therefore not an option. We must have made our assessments and choices in our investment positions already before these take place. Many thanks for your confidence in us Looking back at our annual outlook for 2016, many of our predictions have been confirmed. I assume that this will also apply to this edition. We will in any case do our utmost to help you manage your assets as best as we can. And I would like to express my gratitude for the confidence you have placed in us. Simon Wiersma investment manager Macroeconomics The ball is in the politicians’ court The incentive programmes of the central banks are having less and less effect. At the same time, discontent among various population groups in the West is growing because personal income growth already stalled years ago. They see rising prosperity in the emerging markets and among the wealthiest in their own country. Economic growth could create more jobs and prosperity. It appears that the time has come for politicians to take over the baton and come up with initiatives to put the economy into a higher gear. Economic developments and the financial markets were mainly driven by the policies of central banks in recent years. Lower interest rates and ‘cheap’ money mainly propelled bond prices to great heights and interest rates to historic lows. Bond investors consequently realised unexpectedly high returns. This movement persisted in the first half of 2016, but since the summer the trend appears to have broken. Since the election of Donald Trump as the 45th president of the United States, interest rates have increased further. Bonds with a risk premium are still performing well, but the pressure on ‘safe’ government bonds is continuing to rise. Due to the lack of profits growth, the return on global equities has been moderately positive up until now. For the first time since 2011, emerging market equities performed better than developed market equities. Negative investment return on eurozone bonds? Against the background of slightly stronger global economic growth and slightly less accommodating T policies by the central banks, we expect equities to outperform bonds in 2017. Where government bonds from the eurozone countries are concerned, we are taking account of negative investment results due to slightly higher market yields. For equities, we are expecting a moderately positive return, just like this year. In ‘Analysis of asset classes’, you can find more details of our expectations. The realisation is dawning: a different approach is required... In ‘Investment Outlook 2016: continuing to invest in a world full of change’, we asked the question whether the accommodating policies of the central banks were still effective. Or whether low interest rates might have a counter-productive effect. The growth of the global GDP in 2016 is likely to be at its lowest level since the financial crisis. Meanwhile, there are few signs of inflation picking up. Now, a year later, we can conclude that not only central bankers but also politicians are increasingly recognising the need for a different 5 approach. More and more people are becoming convinced that there are limits to the stimulative effect of low interest rates and that they sometimes have unwanted side effects. ... for example, by stimulating the supply side of the economy Despite the ‘cheap-money strategy’ of central banks, the demand for credit from consumers and businesses in the developed economies has barely increased. Despite low interest rates, savers are saving even more and the readiness of companies to invest is limited. Economic growth in many developed markets is stable at best and remains stuck at a low level. It is time for more stimulation from the supply side of the economy. Only the very wealthiest seem to benefit from globalisation and computerisation There is an even more fundamental issue behind the debate about the monetary policy of central banks. Ever larger groups in the Western world seem to be turning away from the established political order. This aversion is primarily due to dissatisfaction with the current situation. Although economic inequality has diminished in recent years at the global level (between countries), discontent among many citizens has at the same time been increasing strongly. Only a small group in the West, the most well-off, seems to have benefited over the years from globalisation and computerisation. The employees in the emerging markets have also become more prosperous. This development has led to the emergence of antiglobalism parties and threatens to lead to political upheavals in the major developed economies. Striking examples of this are the choice for a Brexit by the British and the election of Donald Trump for president of the United States: a major opponent of free trade agreements. Leadership and initiatives from politicians required... The reversal of globalisation, as promoted by a number of populists in the developed economies, does not seem to us to be the solution for the increased dissatisfaction. Of course, it is not easy to solve the income inequality within countries. Nevertheless, politicians will have to take steps to prevent further social unrest. The stimulation of economic growth by means of, for example, fiscal easing can contribute to this. After all, everyone 6 normally benefits from more public investment and lower taxes. It is not without reason that Christine Lagarde, Managing Director of the International Monetary Fund (IMF), and Mario Draghi, President of the European Central Bank (ECB), for example, have for some time been hammering for reform and stimulus programmes by governments in order to further boost economic growth. Something will in any case have to be done about the increased discontent. Herein also lies the greatest risk to our economicgrowth scenario. ... but doubtful whether we will see this in the short term Stimulation from the supply side of the economy is now expected to be more effective than even lower interest rates. The time seems ripe for this, now that the public finances of many countries are a lot better off than a few years ago. Donald Trump appears to want to take the lead in this by reducing the tax burden and increasing government spending. But it is doubtful whether this is going to happen elsewhere in the short term with a number of key elections - in Germany, France and the Netherlands, for example - on the agenda in 2017. We therefore cannot expect rapid reforms. Stimulus by the central banks is therefore still desired. We therefore expect that this stimulus will still continue for some time, albeit that it will slowly but surely be reduced. Transition of the Chinese economy is also good for the rest of the world A positive development is that concerns about emerging markets have greatly diminished since the beginning of 2016. The stabilisation of the growth rate of the Chinese economy and slightly higher commodity prices, including that of crude oil, have led to a recovery of economic momentum in a number of important emerging countries. The transition of China from an economy driven by exports and the manufacturing sector to one that is driven by domestic consumption and the service sector appears to have gone quite well (with some ups and downs). This is not only good news for the Chinese, but also for the rest of the world. We expect that, due to the acceleration of growth in emerging markets, the growth differential with developed markets will increase again for the first time in years. This very much depends upon Donald Trump’s plans, however. He seems to want to focus mainly on the growth of US economy and has less of an interest in developments elsewhere. Any US import restrictions could harm many emerging markets. Strong price volatility also expected in 2017. Partly because of the uncertainty about the development of the political landscape, we expect that, as in previous years, volatility on the financial markets will remain high. The nervousness will increase around important events, such as the above-mentioned elections in European countries. For investors it is important not to be misled or distracted by emotions and to keep their sights on the long term. H. van Heijster, N. Levy & F. Rengers Investment strategies policy Higher interest rates affect all strategies The policy for ING’s investment strategies is broadly similar, such as the underweight in government bonds and the overweight of equities (as of mid-November 2016). But the strategies do have different emphases and idiosyncrasies. Actueel strategy: technology prominent, but also a wide spread The focus of our Actueel investment strategy is on equity investments in global business sectors. Technological development is a theme that plays a major role in several sectors, up to and including the financial sector and healthcare. In addition, by means of this investment strategy we focus on the accelerating growth in emerging markets, both within equities and bonds. Government bonds, corporate bonds and real estate are also fixed elements of the broadly diversified investment strategy, even though at the end of 2016 we maintain an underweight in government bonds in view of our expectation of slightly increasing bond yields. 7 Duurzaam strategy: more than just climate change Our Duurzaam investment strategy encompasses socially responsible investment. Certain activities and conduct, such as the production of tobacco and the use of child labour, are ruled out as an investment opportunity. We also make targeted investments based on current sustainability issues such as climate change. Companies that contribute to solutions such as the production of wind and solar energy or increasing energy efficiency are strongly represented, both in equities and bonds. In addition to climate change, the Duurzaam strategy also addresses other themes, such as good corporate governance, the working conditions throughout the entire production chain and environmental pollution. Comfort strategy: wide spread of equities across regions Our Comfort* investment strategy is characterised by a broad spread across various asset classes and regions with the emphasis in the coming period on equities. In this class, we currently have a preference for the emerging markets region. Within the bond class, we maintain an overweight position (in relation to the neutral weighting) in high-yield corporate bonds. Government bonds are less well represented in the strategy and predominantly have a short residual maturity. Sensitivity to changes in the market rate of interest is consequently limited. After all, rising interest rates means falling bond prices. Dynamiek strategy: wide spread across investment themes Our Dynamiek* investment strategy also has a broad spread across various asset classes, regions, business sectors and investment themes with the emphasis in the coming period on equities. In this class, we currently have a preference for the emerging markets region. The most important theme is technology, such as the further development of internet (the Internet of Things), and social media. Also more cyclically sensitive companies, such as those in the materials sector, have a heavier weighting in mid-November. Within the bond class, we maintain an overweight position (in relation to the neutral weighting) in high-yield corporate bonds. Government bonds are less well represented in the strategy and predominantly have a short residual maturity. Sensitivity to changes in the market rate of interest is 8 consequently limited. After all, rising interest rates means falling bond prices. Inkomen strategy: emphasis on Europe The focus in our Inkomen investment strategy is on interest income and dividend yield. Besides dividend stocks, we also invest in low-volatile stocks through the Robeco Conservative Equities funds. Low-volatile stocks closely resemble dividend stocks. Common features are less severe price movements and the payment of a relatively high dividend. The geographical spread of investments in the strategy has a heavy emphasis on Europe. This makes the exchange rate risk visà-vis the euro of the Inkomen investment strategy slightly lower than that of our other investment strategies. Within the bond investment class, we maintain an overweight position (in relation to the neutral weighting) in high-yield corporate bonds. Government bonds are less well represented in the strategy and predominantly have a short residual maturity. Sensitivity to changes in the market rate of interest is consequently limited. After all, rising interest rates implies falling bond prices. Index strategy: index-tracking investment with diversification and tactical position changes The Index investment strategy consists entirely of index trackers. The policy is to invest in good quality cost-efficient ETFs and index funds. This means that the returns of the indices are closely monitored. The investments in marketable securities (equities, real estate) are spread via index funds across regional equity index funds and listed real estate. The Index strategy follows the tactical asset allocation that we also apply to our other investment strategies. Within the bond investment class, we therefore also maintain an overweight position (in relation to the neutral weighting) in high-yield corporate bonds. Government bonds are less well represented in the strategy and have a relatively short residual maturity (iShares Euro Government Bond 1-3yr ETF). Sensitivity to changes in the market rate of interest is consequently limited. After all, rising interest rates means falling bond prices. *) The Comfort and Dynamiek investment strategies are available exclusively to customers of ING Private Banking. Simon Wiersma investment manager Analysis of asset classes Positive but moderate expected returns For 2017 we have mostly positive, but moderate return expectations. These are only negative for government bonds. In 2017, we are expecting less rather than more stimulus by central banks. Given the slightly higher interest rates, we are counting on slightly lower equity valuations. There is consequently little upside potential. Investors in government bonds that are considered safe, such as those of the Netherlands or Germany, must take account of negative returns. Due to the rise in interest rates, the interest received will possibly not fully compensate for the price losses on bonds. Was 2016 the last good year for bonds for the time being? 2016 was a surprisingly strong year for bonds. Especially bond classes with a high risk premium on the effective yield (market rates) produced much higher returns than we had expected due to lower interest rates in 2016. In a number of cases, these bonds even outperformed the index of global equities. Some bond classes realised as much as double-digit rates of return. Important economic factors were moderate but positive economic growth, low inflation and the strongly accommodating policies of the central banks. A decisive economic circumstance was the continuing search by investors for investments that yield immediate returns, thus interest or dividends. Due to these factors, bond yields - against the general expectation - continued to decline, as did the risk premiums in the market interest rates. Higher interest rates on the horizon For bond investors, we believe that now is the time to switch. The trend of the last 35 years with increasingly lower bond yields has been weakening since the summer of 2016 and appears to be reversing. Accelerating economic growth, higher inflation and less expansionary monetary policies by central banks have led to rising bond yields from historic lows. We expect that this movement will continue in 2017. As described in the Macroeconomics article, various central bankers are beginning to realise that negative interest rates also have adverse consequences. It appears that savers are spending less rather than more. And especially the banking business model has come under pressure due to the low capital market rates. In response to this, we expect that, for example, the European Central Bank and its Japanese counterpart, the Bank of Japan will aim to further reduce the downward pressure on long-term interest rates. Combined with slightly improving economic growth and rising inflation, as a result of the rising 9 pressure of wages on costs in the US and higher raw material prices in the rest of the world, long-term interest rates will therefore rise further. We anticipate a shift in demand from ‘defensive’ to ‘cyclical’ equity sectors Negative expected return on government bonds in the eurozone... Short-term interest rates, which apply to loans with a maturity of less than two years, are expected to rise only slightly. The policy rates of the central banks, with the exception of those of the United States, will not or will hardly be increased to ensure that the economy does not slow down too much. For bond investors, a steepening of the yield curve means that they will be faced with lower prices. Our return expectations for eurozone government bonds in 2017 are consequently negative. In our investment strategies we have therefore had a tactical underweight in bonds in relation to our neutral (‘strategic’) distribution for some time already. ... hence our preference for other bond classes Within bonds, we have a preference for bonds with a low interest rate sensitivity, or short duration, because existing bonds are worth less when interest rates rise. In addition, we expect that bonds with a risk premium in the effective yield, such as highyield bonds and emerging market bonds, will perform better than government bonds. Decreasing risk premiums will be able to partly offset the impact of higher interest rates. The relatively high coupon rates are also attractive. Despite the low expected return, we are however also continuing to invest in government bonds in our investment strategies, since such bonds are the only asset class to offer protection in times of increasing uncertainty. 10 Corporate profit growth at last, even though it is only 2% Equities presented a mixed picture in 2016. In the emerging markets we generally saw good yields. But those in the developed markets were rather disappointing (in local currencies). For the first time since 2011 emerging markets equities are performing better than those from the developed economies. We expect that this will also be the case in 2017. In 2016, as in previous years, it appeared that the average profit growth expectations of analysts from listed companies were too high. Immediately from the beginning of 2016, analysts rapidly adjusted the profit growth expectations of companies downwards. They did so in response to the then strong decrease in commodity prices, including that of oil, and concerns about China’s economic growth. However, since the summer of 2016 analysts have positively adjusted their lowered expectations, in part due to better than expected global growth figures and more favourable third quarter results. Nevertheless, only limited earnings growth is now expected for 2016: slightly less than 2%, judging by the average analyst estimates. We expect average profit growth of 7% in 2017 We are more optimistic for 2017. Analysts assume an average profit growth in excess of 12%. That seems too high to us. We believe that 7% is more realistic, with the profit growth of companies in the emerging markets exceeding that of companies from developed economies. Our estimate for 2018 is 4%. At the same time, we expect that the average price-earnings ratio will decline slightly. All in all, we arrive at an expected return on global equities of about 5% for 2017, calculated from the price level on 9 November 2016. Sector preference: more ‘cyclical’ equities Due to the increasingly lower bond yields, during the past few years investors often opted for investments that generated regular income. These were not only other bond classes, but also equities with a relatively high dividend yield, such as real estate equities and other equities from sectors where dividends are generally stable and relatively high. Examples of such ‘defensive’ equity sectors are utility companies, telecommunications companies and consumer staples. We expect the preference for these types of equities will change in 2017. The increased likelihood of fiscal stimulus in the US and Estimated returns in 2017 You can find our expectations for investment returns in 2017, by asset class, in the table below. The value of these figures should not be overestimated. These are only possible outcomes, to which we would also like to note that they concern index returns. The cost of investing, such as any transaction costs and the service fee, still has to be deducted therefore. Europe is expected to lead to higher interest rates. Defensive and interest-sensitive equity sectors are consequently less attractive. On the other hand, more cyclically oriented regions and companies can benefit from this as they usually do better when there is a resurgence of growth and take advantage of investments in infrastructure, for example. Outlook 2017 test High-yield corporate bonds (USD) Emerging market debt (USD) Global equities (LC) Global real estate equities (EUR) Corporate bonds (EUR) Government bonds (EUR) Total return -4% -2% 0% 2% 4% 6% Source: Thomson Reuters Datastream, ING Investment Office The value of your investments may fluctuate. Past performance is no guarantee of future results. No account has been taken of the service fee. This must be deducted from the return. The abbreviation LC stands for ‘local currencies’. Source: ING Investment Office, 9 November 2016. 11 Tactical asset allocation as at 14 December 2016 Equities Real estate Commodities Alternatives Bonds Regional allocation North America Europe Japan Emerging markets Pacific (excluding Japan) □□□■□ □□■□□ □□■□□ □□□■□ □■□□□ □■□□□ □□■□□ □□■□□ □□□■□ □□■□□ Sector allocation equities Energy □□■□□ Materials □□□■□ Industrials □□■□□ Discretionary □□■□□ Consumer staples □■□□□ Healthcare □□■□□ Financials □□■□□ Information technology □□□■□ Telecommunication services □■□□□ Utilities □□■□□ Allocation of bonds Government bonds Corporate bonds High-yield corporate bonds Emerging markets bonds □■□□□ □□■□□ □□□□■ □□■□□ Source: ING Investment Office This is our tactical asset allocation as at 14 December 2016. Our current allocation can be found in the Monthly Investment Outlook on www.ING.nl/Beursnieuws. 12 Bas Heijink technical analyst Technical analysis Rising long-term trend continues in 2017 The markets have had a volatile year, sometimes with substantial corrections. But the rising long-term trend remained intact in the most important equity markets. What is technical analysis? Technical analysis is a method of analysis where trends and recognisable patterns are sought in price charts and other market data. Based on these, the technical analyst makes judgements about the situation in the relevant market in the short and long term. The most important information that the analyst uses for this are the price, trading volume and the time. The analyst assumes that market movements are the result of investor behaviour. As a consequence, trends and other price patterns arise in the price charts. Technical analysis is not so much the prediction of price movements, but rather the outlining of the most likely future scenarios on the basis of market data. The technical analysis will regularly deviate from the fundamental vision. ING’s investment strategies are mainly established on the basis of fundamental analysis. 13 Will the AEX break through the top of the current bull market in 2017? The long-term trend in the AEX index, which has been rising since 2009, is still intact. Just like in 2012, the AEX marked a very important higher bottom in the long-term picture at the beginning of 2016. Following a long decline phase that started at 510 in April 2015, the AEX marked the higher long-term bottom quite a lot lower in February 2016 at 378.50. As a result, the first quarter of 2016 was characterised by a classic major trend reversal at the end of a substantial corrective phase. AEX index Source: Reuters Metastock XIV, November 2016 Our first target is the 475 – 485 zone With the bottom in February 2016 at 378.50, a new medium-term upward trend also started. At the time of writing (mid-November), the AEX was still struggling with the heavy and repeatedly tested 457458 resistance zone. But we expect that the index will continue its upward path. The first target is the 475 – 485 zone. In the first half of 2017, we are taking account of a test of the zone in which the peaks of this bull market lie: the area between 495 and 510. We even think it likely that the AEX will climb above 510 during the year. But, as in the past few years, we expect several corrections in 2017. 14 However, it is unlikely that this will be as large as the long correction phase which took the AEX from 510 to 378.50. Chinese equities: start of new bull market For the Chinese equity market, we look at the Hang Seng China Enterprises Index. Until the beginning of 2016, this index was falling in a sharp downtrend, losing half of its value: the price halved from 15,000 to 7,500. A new upward trend has now arisen, which is only at the beginning of its development. The important bottom lines are 9,000 and 8,200. With a figure close on 9,500 at the time of writing, the China Enterprises Index is close to an interesting floor. In 2017 there is room to rise to the heavy horizontal resistance at about 11,500. This means that the China Enterprises Index has considerable upside potential, although we should note that the Chinese equity market can be very volatile. Hang Seng Chinese Enterprise Index Source: Reuters Metastock XIV, November 2016 Oil price: strong turning point and a lot of potential At the beginning in 2016, we increased our technical opinion on the oil price from negative to positive. The WTI oil price fluctuated around $30 to $32 when it completed a number of major bottom patterns and buy signals were triggered. The WTI oil price has now already reached our price target at that time ($51) on several occasions. Nevertheless, we expect a continuation of the upward long-term trend and thus a breakout of our previous price target. Above $51, a large inverse head and shoulders pattern is completed with a calculated target of $74. In the interim, there is still an important resistance line at $62. There is thus once again considerable upside potential for the coming year. An important floor in the upward medium-term picture lies at $38. 15 WTI oil price in US dollars Source: Reuters Metastock XIV, November 2016 Possible considerable increase in 10-year Dutch government bond yields in 2017 The long downward trend in the Dutch ten-year yield that started in the early nineteen nineties is still intact. The ceiling of the downtrend channel, the downward sloping tops line, currently only lies at about 3%, however. The ten-year yield thus has considerable room for an increase before the declining long-term trend is technically broken. Nevertheless, a major turn took place in the months of September and October 2016. Both the tops lines descending from June 2016 and from July 2015 were broken, following a threemonth consolidation phase when the interest rate fluctuated around 0%. This brought an end to the sharp decline from the July 2015 peak at 1.25%, thereby signalling a clear buy signal for the subsequent months. It is not yet possible to say whether the bottom in the long-term picture has finally been reached, but we consider a significant increase in interest rates to be possible in 2017. Targets lie at 0.54% and 0.88%, and we cannot even exclude a test of the 1.25%. The interest rate market continues to be very volatile, however. 16 Source: Reuters Metastock XIV, November 2016 Dutch 10-year yield Important Information The value of your investments may fluctuate. Past performance is no guarantee of future results. You may lose (part of) your investment. No account is taken of the costs of investment, such as a service fee. These costs must be deducted from the return. Disclosure This technical analysis was prepared by Bas Heijink, technical analyst at ING Investment Office and issued by ING Bank N.V. His remuneration is not dependent upon specific observations or views expressed in this publication. Nor does he hold investment positions in the financial instruments referred to. Disclaimer This publication has been prepared on behalf of ING Bank N.V., established in Amsterdam, solely for the information of its clients. ING Bank N.V. is part of ING Groep N.V. This publication contains investment recommendations but not investment advice or an offer or solicitation for the purchase or sale of any financial instrument. ING Bank N.V. secures its information from sources it regards as reliable and has taken all reasonable care to ensure that the Source: Bloomberg, November 2016 information on which it based its view in this report is not untrue or misleading at the time of publication. ING Bank N.V. makes no representation that the information used by it is accurate or complete. The information in this publication is subject to change without notice. Copyright and database rights protection exist in this publication. Information in this publication may be used as long as the source is mentioned. ING Bank N.V. has its registered office in Amsterdam, Commercial Register no. 33031431, and is supervised by the Dutch Central Bank (De Nederlandsche Bank N.V.) (“DNB”) and the Netherlands Authority for the Financial Markets (Stichting Autoriteit Financiële Markten) (“AFM”). It concerns an investment recommendation based on technical analysis, which is an autonomous analysis method. The investment recommendation on the basis of technical analysis may differ from other investment recommendations issued by ING Bank N.V. 17 Jochen Harkema - sustainable investment analyst Peter Tros - sustainable investment analyst Sustainable investment Limiting CO2 emissions high on the agenda since climate agreement Since the climate agreement in Paris, all eyes are focused on climate change as the main theme within sustainability. But other sustainability themes remain equally important. With sustainable investment, we examine long-term developments. Climate disruption is one of these. With the climate conference at the end of 2015, attention for this has grown rapidly; it is the main theme within sustainable investment this year. New Dutch plans focused on climate There are more and more initiatives to reduce global warming. At the National Climate Summit on 26 October 2016 in Rotterdam, an attempt was made to launch as many climate campaigns in the Netherlands as possible, with the slogan ‘Bring Paris home’, because the agreements made in the Paris Climate Agreement must be fulfilled. The three most important plans presented at the National Climate Summit were the launch of a ‘CO2 Smart Grid’ (the capture of carbon dioxide and its utilisation in horticulture, for example), the building of gas-less districts by municipalities and provinces, and energy saving by government and businesses. The oil sector will also move But not only in the Netherlands are steps being taken to limit climate disruption. Following the Paris climate agreement, steps are being taken on various fronts. An important step forward was taken by oil giant Exxon. Just like the larger European gas and oil 18 companies, the company now wants a tax on CO2 emissions. Such a tax ensures the ‘inclusion’ of the costs incurred due to the environmental effects of the greenhouse gases emitted during the production of oil and other commodities. This improves the operation of the market since the tax leads to higher prices and thus less demand (and emissions), improves energy efficiency and makes clean forms of energy more competitive. Even oil giant Exxon wants tax on CO2 emissions What is sustainable investment? Opinions differ widely on what ‘sustainable’ investments are. The common denominator is that these involve investments in the equities or bonds of companies, institutions or countries that treat people, the environment and society with respect. Certain branches of industry (the arms industry, for example) or parts thereof (the manufacturers of cluster bombs, for example) are often excluded. Involvement in corruption, environmental crimes or activity in the alcohol, gambling or adult entertainment industry are often used as a ground for exclusion. For countries, exclusion criteria, such as violation of human or democratic rights and the carrying out of death sentences, apply. Sustainability at ING ING applies strict standards when selecting investments eligible for inclusion in the Duurzaam investment strategy. We not only test these investments against the exclusion criteria, but also examine whether there is a positive policy for people, the environment and society. A tool used for this is the NonFinancial Indicator (NFI) developed by ING. The NFI can have the following values: – (policy rated lower than the industry average), = (better than average), + (trendsetter: among the best 30%) and ++ (strong trendsetter: among the top 10%). The NFI score is determined on the basis of the policy aimed at sustainability. Not only companies receive such an NFI score, but also investment funds. A company or investment fund must score at least a = to qualify for inclusion in the ING Duurzaam investment strategy. Would you like to know more about sustainable investment at ING? You can find more information about this on the ‘Investing with a view to the future’ page. CO2 tax increasingly likely The likelihood of such a tax being introduced has increased due to the support of major oil companies. More initiatives to reduce CO2 emissions are also coming from other sectors. In July 2016, the US Environmental Protection Agency published a report on the environmental impact of the aviation sector, which also included improvement measures. The aviation sector was possibly stimulated by this and in October made its own proposal to reduce its environmental impact. The proposal is not aimed at reducing emissions, but compensating for them by means of afforestation (from 2020), for example. The proposal still has the status of a voluntary agreement, but a number of countries have indicated that they will abide by it. In business sectors where for years there was no interest in climate change and where there was no desire to take any steps, companies now appear to be ready to move. Our expectation is that the attention paid by businesses and governments to greenhouse gases will continue to increase. And this will not only be confined to attention, but also lead to action. Legislation, guidelines and agreements are leading to a scaling up of activities. A tax on CO2 emissions is increasingly likely. This will have direct effect on a number of sectors: utilities, energy and transport. Growing market share for sustainable products At the same time, there are companies that effectively know how to respond to the attention for climate and environment. They come up with products that can reduce CO2 emissions and its presence in the atmosphere. In recent years, manufacturers of wind turbines (windmills) have benefited greatly from the attention to the climate and every year see their turnovers increase. Sales are also increasing within the solar energy sector, but due to the large number of providers, there is strong competition so that these companies have been unable to convert large sales volumes into higher profits. Further consolidation is necessary in this sector in order to also raise corporate earnings. Scale is also needed to make innovations profitable. Other themes are also important, SDGs Since the climate agreement in Paris, all eyes have been focused on climate change as the main theme of sustainability. However, sustainability is not just climate change and other topics also deserve our attention. Examples include good corporate governance, the working conditions throughout the entire production chain and environmental pollution. The sustainable development goals (SDGs) of the United Nations (UN) identify key sustainability issues. Also attention for well-being, equality, infrastructure and ecosystems In addition to climate and environment, wellbeing, equality, infrastructure and ecosystems are important elements of the SDGs. These goals are a follow-up to the Millennium Development Goals (MDGs), which were adopted in 2000 and covered a period of 15 years. 19 The SDGs build on a number of the eight Millennium Development Goals, although the SDGs, which are valid between 2015 and 2030, go a step further in terms of ambition. The UN expects that they are only feasible if companies, societies and governments structurally work together. We take account of SDGs in our selection It can be difficult for investors to determine for themselves whether (and how) companies make a specific contribution to the goals. You can read in ‘Investing for change’ how the sustainable development goals are incorporated in ING’s sustainability test. The SDGs are just as important as limiting climate change. Companies that take absolutely no account of the SDGs are not included in our Duurzaam investment strategy. Your contribution As an investor you have an important role since you can influence whether businesses gain access to capital. With your investment decisions, you determine whether businesses are able to expand their activities or not. Think of companies that make a positive contribution to the environment or help reduce climate change. You can therefore make a personal contribution to what happens in 2017 and thereafter. Examine the sectors 20 Sectors ING’s outlook by sector Although the economy as a whole is not growing strongly, progress is indeed being made and there are innovative developments. New providers are taking the place of businesses that stand still. Cor Blankestijn Investment analyst Durable consumer goods Do consumers actually benefit from the sharing economy? The sharing economy, but also self-driving cars and the combination of content and networks, are important themes that play a role in 2017 in the durable consumer goods sector. What does the durable consumer goods sector consist of? Durable consumer goods include TVs and refrigerators, products in and around the home, cars and jewellery. Service providers like cruise companies and advertising agencies are also included in this sector. In our previous annual outlook for this sector, an important theme was the environmental requirements imposed by the various levels of government and regulators that car manufacturers have to comply with in 2021. The emissions scandal with rigging software for Volkswagen diesel engines had just erupted. This year, the automobile sector, within durable consumer goods, appears to be the worst performing subsector on the stock market. Car manufacturers were forced to exchange polluting fossil-energy-powered engines as quickly as possible for hybrid, also electrically-powered systems. Or even better: to replace their range of vehicles as soon as possible with completely electrically-powered models. 21 The self-driving car is the new challenge for the sector... This is also what happened en masse. In imitation of the popular models of pioneer Tesla, a long line of electrically-powered models came onto the market from almost all manufacturers in 2016. All these models have a driving range of 300 km or more as desired by consumers. This growth of new electric models will continue in 2017. Problem solved for the automobile sector, you could say. Unfortunately, new obstacles appeared on the road last year, and in the coming years the results of car manufacturers will be influenced by two developments: self-driving cars and car-sharing services. While self-driving car transport, also referred to as ‘autonomous driving’, still seemed far away last year, there are now already cars on the road that can do this or will be able to in 2017. In addition, there are already trucks that can autonomously deliver their loads and taxis that transport people without a driver. The frontrunner is obviously Tesla, but also BMW and Daimler (Mercedes) are among the companies that have considerable expertise in-house for this. And strangers to the field, such as Google, are also considering initiatives. ... as is the emergence of car-sharing services The other theme of 2017 for the automobile sector, car-sharing platforms, largely also has the same protagonists. These are primarily the large, leading car brands that are working together with specialised carsharing services like Car2Go and Drive Now, although other manufacturers are also linking up with wellknown car sharing services. Even oil giant Exxon wants tax on CO2 emissions Following the diesel scandal, the sector is certainly switching a lot faster than before. Nevertheless, 2017 will probably be a difficult year for the sector. The car makers must earn enough with their old ‘fossil business’ in order to be able to invest in the future of driving. Government assistance would be welcome: the sector can certainly use subsidies for cleaner driving. 22 Where does the money go that is saved on cars? These themes might not appear to be so important for the wider durable consumer goods sector, but they are, since such developments will partly shape future consumption. The emergence of the sharing economy, in this case car sharing, after all leads to consumers investing less in car ownership. Where will the money that is saved go to? To events, more travel, more restaurant visits? Or into savings and debt repayment? In the United States, many Millennials (people born between 1981 and 2000) will certainly be able to put the savings to good use: their student loans currently average $100,000 when they enter the labour market. Déjà vu: attempted collaboration between telecom and media content companies Another theme for the sector in 2017 also already presented itself in 2016. Now that many consumers are watching less linear TV for various reasons, it is increasingly necessary for telecom and media companies to develop other business models. After all, they see that customers are cancelling their cable TV subscriptions (or downgrading to less expensive versions) or are consuming video content in other ways, for example via tablet or smartphone. Both telecom and media companies are buying into companies that specialise in this new media or in the associated content. Netflix: the ‘disruptor’ of the multimedia sector The first major mergers have once again already been announced, including the generous takeover bid that US telecommunications company AT&T made in October for the media corporation Time Warner, known for its highly regarded content divisions Warner Bros., CNN and HBO. The telecom company is taking a strategic step forward and sees opportunities for steaming the content of HBO, for example, to the homes of customers through its broadband connections. Consumers can then decide where, when and on which device they view that content. AT&T is actually mimicking the successful online video ondemand service Netflix, currently the biggest disruptor of the multimedia sector. Consumers almost all over the world can stream Netflix programmes, not only purchased films and series, but also many of its own (high-quality) productions. Companies with good content, such as Time Warner, Walt Disney and Comcast, have high potential Industry expansion makes a higher market valuation possible for telecom companies since on average they have a much lower valuation than multimedia companies. The latter category produces content itself and is likely to be the big winner on the stock markets in 2017, at least if the mergers and acquisitions gain regulatory approval. The fact is that the combined companies control a large share of the market so that other providers are likely to be squeezed out of the market. Contenders for success are the companies with the best content, such as Time Warner, Walt Disney and Comcast. There are also the groups with large financial resources, such as the innovative Amazon, which has also been producing its own content since last year. That content can then also be watched on Amazon’s own tablet, the Kindle. Cor Blankestijn investment analyst Consumer staples The sale of fresh food also increasingly online During the past few years, companies in this sector were almost only able to realise growth through online sales. This trend is entering the next phase. What are consumer staples? Besides the beverage industry, the consumer staples sector includes the subsectors foodstuffs, household and personal care products, retail chains and tobacco companies. Defensive nature of the sector: from plus to minus The average valuations (such as the price-earnings ratio) of companies in the consumer staples sector have been higher than the long-term averages for some years already. The valuation of some equities is even at an historic high, even though the comparable (identical) growth in turnover and profits was minimal in recent years. This sector provides the primary necessities of life and thus has a defensive character. For this reason, the equities of these companies were much in demand in recent years with weak economic growth. This led to relatively high prices and valuations. Price increases to offset currency losses... The profits and turnovers of many companies in the 23 retail, foodstuffs, beverages and tobacco subsectors are falling. One of the causes is the weakening of currencies in their markets, both in emerging markets and closer to home - such as the exchange rate of the British pound in euros since the Brexit referendum. Companies with strong pricing power can offset some of that lost revenue by raising the prices of products. Apple, for example, tries to make up for all currency losses by increasing its prices in the UK by the percentage of the currency fall. Whether it is successful is uncertain. ... but also better than expected currency effects Conversely, UK companies that realise considerable turnover in export markets can benefit from the weak currency when they convert their foreign revenues into pounds. The main beneficiaries up until now are therefore, for example, spirits manufacturer Diageo and tobacco giant British American Tobacco, which generates almost 80% of its sales outside the UK. Some large retailers are too late with offering their products online Growth is in clicks (webshops) not in bricks (stores) A major threat to traditional retailers that offer foodstuffs is the strong growth of online sales of food (including fresh produce), while the growth in the physical stores is minimal. That is also a reason for many of these retailers to launch online initiatives in addition to their physical presence. However, they often lack scale or simply started too late with this type of service and larger newcomers have quickly conquered a large chunk of the market. ‘The freshest way to shop’ Ahold Delhaize has a major share of the webshop market for foodstuffs in the Netherlands via Albert.nl and, with the acquisition of Bol.com, has become a strong online player. In the United States, Ahold Delhaize is active online with Peapod (slogan: ‘the freshest way to shop’). Tesco is the largest online supermarket in the United Kingdom (UK) with almost half of all online spending. Tesco, however, is now 24 facing competition from Amazon Fresh, the fresh food department of Amazon.co.uk, which is aiming for strong growth in the UK. The range of online products is virtually unlimited. That can be a reason for many consumers to switch from brick and mortar stores, with their limited product range, to the online players that lure new customers with innovative apps and gadgets. For some classical shopping centres the future seems bleak, others have better prospects as ‘experience centres’. Crackdown on sugar and salt, as well as tobacco For the companies in the subsectors of tobacco, soft drinks and snacks, the health theme will continue to play an important role in 2017. In 2016, many of these companies had to step up their efforts to comply with the rules of regulatory authorities and governments. The approach was often to present the manufacturers of such foods and beverages with part of the bill for medical expenses caused by the consumption of unhealthy products. The crackdown affects sugar and salt just as much as tobacco. The situation will not change in 2017, also because many countries can really use the extra tax revenue to replenish government deficits. Despite the additional taxes, Pepsi, Coca-Cola and British American Tobacco have the power to raise prices thanks to their strong brands. New ‘local’ cosmetic brands in Asia growing more strongly than multinationals In the household and personal care subsector, multinationals are facing increasing competition from local producers. These have been busy during the last few years and the quality improvements they have made are clearly visible. New cosmetics and deodorant brands are especially appearing in Asia, and their turnovers are growing many times faster than those of the listed multinationals that we monitor. Multinational companies can only retain their market share with the correct pricing and marketing policies and superior quality products. We think that companies like Unilever and L'Oréal have such a good reputation that their market share will remain stable. But if anything goes wrong in the production chain, producers can lose their good name for many years. An example is the scandal of the Chinese branches of Kentucky Fried Chicken which processed chicken that was already past its sell-by date. The cause was a subcontractor that had made a mistake, but the damage for Yum! Brands, the parent company of KFC, was enormous. Revenues therefore fell sharply as a result of loss of confidence Marina Hagoort investment analyst Materials Growth of the world economy can force up prices of materials We do not expect the prices of agricultural products and agricultural chemicals to rise. However, we do think that the demand for other materials will increase. Prices will rise if there is a lag in supply. What are materials? In the materials sector, companies actively produce and process raw materials such as mining firms, chemical companies and manufacturers of building materials and paper. Agricultural products are also materials. The demand side becomes more important for the mining industry in 2017 The recovery of the prices of many metals and minerals in 2016 was largely due to a reduction in supply and the expected future demand. We expect that new mine closures and shutdowns will be compensated in 2017 by the taking into production of new capacity. Whether the supply nevertheless remains tight, so that prices rise, depends in 2017 even more than in 2016 upon growing demand. And this is again dependent on the worldwide economic growth and in particular in China. Chemicals markets more balanced, outlook for agricultural chemicals remains subdued In the chemical sector too, the production capacity recently came more into balance with demand. Moreover, rising energy costs are reflected in the selling prices for chemicals. The consolidation announced in the agricultural chemicals industry (including the fertiliser industry) offers the potential for greater discipline among producers so that it is not so easy to reduce prices in the struggle for market share. However, because of falling crop prices we see little chance of an increase in agricultural income, which is necessary 25 for growth in demand in the fertiliser sector. Due to disappointing earnings, farmers will continue to cut back on agricultural chemicals. Additional infrastructure investments possibly a global trend in 2017 Investments in infrastructure may boost the demand for building materials All over the world more and more economists and politicians are arguing that additional investments in infrastructure are a means of sustainably 26 stimulating the economy. Not only the demand for metals, but also for building materials would receive a strong impetus if China were to announce increased infrastructure investments. During his election campaign the President-elect of the United States, Donald Trump, promised economic stimulus in the form of infrastructure spending. This may become a global trend in 2017. Hopes in 2017 are pinned on increased demand Of all the sub-sectors within the materials sector, we have the lowest expectation for the prices of agricultural products and agricultural chemicals. Any improvement in these markets would therefore be a positive development. Our hopes for most other materials in 2017 are pinned on an improvement in demand. Marina Hagoort investment analyst Utilities Electricity suppliers must respond to new technologies Electronics and electrical appliances are becoming increasingly efficient. The demand for electricity is consequently decreasing. At the same time there are also new kinds of electronics, such as electric cars. Utilities that respond the best to these developments are the future winners. What are utilities? In the utilities sector, companies are actively engaged in the production, storage and supply of electricity, gas and water. Companies that collect and process waste or purify water are also included within this sector. Technological advances are changing the sector For 2017 and subsequent years, we expect that the utility companies which take advantage of new technologies will perform the best. Electricity producers who do not do so, will find it increasingly difficult to make a profit. An important long-term development is the integration of batteries for electricity storage in power grids, so-called smart grids. This allows electricity, which is generated locally with wind or solar energy, to be stored in the network for use elsewhere or later. It is expected that the costs of such batteries will decrease by more than half during the next decade. Closing conventional capacity would bring more balance to electricity markets The generation capacity of sustainable (or renewable) energy continues to increase. Nevertheless, a lot of conventional capacity, such as power plants based on coal, gas and nuclear power, is still being maintained. This is necessary so that sufficient electricity can also be supplied when the wind is not strong enough or the sun is not shining. The overcapacity that has consequently arisen on the energy market in recent years pushes down electricity prices. Increasing the electricity storage capacity would make the availability of sustainably generated electricity much more reliable. The conventional capacity could then be reduced, so that the electricity markets were more in balance. The downward pressure on electricity prices correspondingly falls. 27 More storage capacity required to make renewable electricity reliable Closure of loss-making capacity is ultimately inevitable This support for electricity prices offers energy companies compensation for the losses they have to incur when closing conventional capacity. Renewable energy producers benefit the most from this. Utility companies that wait to close lossmaking capacity merely postpone the pain. This may be dictated by unrealistic management, but regulations also hamper the closure of capacity. From electricity generation to services Improved and cheaper electricity storage would also facilitate the decentralisation of energy generation, thus the generation of electricity at more locations 28 and on a smaller scale. If households themselves are able to generate and store enough electricity, they no longer require an external supplier. This would have a negative impact on the production and supply activities of utility companies. On the other hand, market players that supply the equipment for generating capacity (solar panels, for example), batteries and supply the associated services, can benefit from this decentralisation of power generation. Technological developments are also accompanied by new electricity requirements Due to the advancing technological developments, electronics and electrical appliances are becoming increasingly efficient, thus reducing the demand for electricity. On the other hand, new forms of electronics are also being developed by means of technological advances. An important example of this are electric vehicles. The more that is driven by electric power, the greater the demand for electricity and charging points for transport. This growth market also offers opportunities for the sector. Jan Kleipool investment analyst Financials F i n a n c i US banks expect fewer regulations under President Trump The financial sector is one of the few sectors that can benefit from higher interest rates. Thanks to efficiencies, lower litigation costs and fewer regulatory pressures, we believe that the recovery of the sector can continue. What are financials? Within financials we find banks, (re)insurers, asset management companies and concerns that provide them with services, such as securities service providers. The sustained underlying recovery combined with higher interest rates and a low valuation make the sector attractive. The balance sheets of banks have become significantly stronger thanks to strong capital generation, restructuring, share issues and the sale of various divisions. In addition, the operating results (including the turnover and earnings performance of the activities) are improving and the negative effect of the bad banks is diminishing. We expect these trends will continue in 2017. Furthermore, positive developments may occur that have a favourable effect on profits (‘catalysts’). These include the recovery of the income of investment banking divisions, good cost control, continued growth of loans and a further decline in payment defaults in Europe. Financials well positioned for higher interest rates... Financials is in our opinion one of the few business sectors that can benefit from both further rate hikes and the possibly steeper yield curve in the United States (US). We are also taking account of a steeper yield curve in other countries and regions, such as Europe, the United Kingdom and Japan. Higher interest rates are not only beneficial for the interest margins of banks, but also for the capital positions of insurers and, in the longer term, for the investment portfolios of financial institutions. Interest rate increases may also have a negative effect for banks 29 ...but there is a risk that the policy rate will be increased too late in the cycle The rate hikes by the Federal Reserve are, however, coming late in the economic cycle, with the possibility of a new cycle of payment defaults and decreasing lending. However, this is a risk that we do not expect will play out any earlier than in the second half of 2017. For a structural recovery of the sector, we consider it necessary for the growth of the European and US economy to continue increasing, customer activity to pick up and interest rates to rise slightly. This is because growth is beneficial for the average creditworthiness of borrowers and higher interest rates improve the interest margins of banks. The financials engine is ready to run on more cylinders We believe that after 2016 the peak is now past with regard to litigation costs, including penalties and claims for damages for, among others, Deutsche Bank, Credit Suisse and Barclays. In addition, interest rate increases by central banks and slightly rising market interest rates in the US, as already stated, are also positive for the financial sector. Higher interest rates may on the contrary have a negative impact on many other sectors. The sector is, we believe, well-positioned to take full advantage of more growth in Europe and the US. In combination with the low valuation, the sector offers attractive investment opportunities in our opinion. Jan Kleipool investment analyst Real estate Headwind expected from rising interest rates In recent years, real estate was a popular alternative for those needing regular income. Trusted government bonds yielded hardly any return. But bond yields appear to be rising again. The best years of the current real estate cycle are behind us The real estate industry is faced with a new cycle of policy rate hikes by central banks in the coming years. Valuations based on (rental) 30 income-related criterion in the United States (US) and Europe are on the high side. The low bond yields still mean that the dividend yield on listed real estate is relatively attractive. This partially justifies the current valuations, but we believe offers too little certainty since the difference can quickly diminish when interest rates rise. Higher interest rates make real estate less attractive in relation to regular equities Pace of rate hikes and economic growth determines real estate return The sharp decline in interest rates and the economic recovery in the US and Europe have led in recent years to healthy returns from real estate. With higher interest rates anticipated for 2017, we expect that real estate will experience more headwind as an asset class. The real estate sector can, in our opinion, exhibit a stable to positive price trend. The condition, however, is that the pace of rate hikes by central banks remains low and is accompanied by a sustained upturn in economic growth in the US and Europe. Weakening operating trends The operating trends, i.e. developments in the operating results, are still positive for most US real estate equities, but at various real estate companies in the US the forecasts have either been reduced, are disappointing or the positive trends are weakening. Furthermore, the planned Brexit has a negative impact on the real estate market in the UK, which could have a negative effect on the sentiment towards listed real estate throughout Europe. The operational outlook for real estate has in our view become less favourable. Past the peak The outlook for listed real estate is we believe less favourable than in recent years for both the medium and long term. With the prospect of higher interest rates, excessively high valuations based on income standards in Europe and the US and weakening operating trends, the peak of the cycle of global listed real estate is expected to be behind us. We do not expect excessive price developments for listed real estate in 2017. 31 David Wolters investment analyst Industrials Investing in ‘smart’ production is essential in order to keep up Economic growth is no guarantee of higher profits in this sector. Most markets are faced with fierce competition. The difference between profit or loss can sometimes be found in details such as software or external factors such as oil prices. 32 What is the industrial goods sector? The industrial goods sector is a diverse sector that includes companies which produce capital goods or operate large capital-intensive projects, such as railways and airports. Service providers, such as employment agencies, are also included in this sector. Higher interest rates make real estate less attractive in relation to regular equities The industrial goods sector, which also includes companies such as aircraft manufacturers, employment agencies and airlines, is relatively sensitive to global economic growth. It is therefore a so-called cyclical sector. In addition, this sector is influenced by another factor: the commodity prices. For a number of years, these have already been very low compared to the previous years. As a result, manufacturers of mining equipment, for example, are affected by the widespread postponement of investments by the major mining companies. At the same time, airlines benefit from low oil prices, so that fuel costs have decreased. Nevertheless, the aviation subsector is not doing so well: airlines are suffering from (the threat of) terrorist attacks and overcapacity. The railway companies in the US also suffered from declining demand for transport capacity in 2015 and 2016. One of the causes of this is a low gas price. US utility companies consequently use less (more expensive) coal to generate electricity, so that less coal was transported. Finally, some sub-sectors are suffering from the slowdown in economic growth in China, although it appears that the diminishing growth is stabilising there now. Many developments therefore influence one another, with economic growth being the most important factor. And although the prices of some commodities rose sharply in 2016, the commodity prices over the longer term are still considered low. Innovation through the smart application of technology Innovation can provide a competitive advantage. It therefore remains important for industrial enterprises to invest in this. Technological developments are taking place at a rapid pace. Consider, for example, the advance of the 3D printer, the ongoing computerisation, robotics in factories and the Internet of Things. Another example is the increased efficiency of rail transport by means of smart software. Using data about rail traffic, the conditions on the rails and information about the mechanical condition of train components, analyses can be produced in order to avoid delays. In our view, these are developments that will be even more important in the future. Robots make robots. And hardware with embedded software In the field of robotics, we follow a company that manufactures industrial robots, the Japanese Fanuc. With the aid of robots, this company produces robots seven days a week, 24 hours a day, and is the world leader in the field of factory automation. We expect that robots will play an increasingly important role, not only in factories but also elsewhere in society. Innovative companies like Tesla and Apple already make full use of robots in their factories. Within the industrial goods sector, we also believe that the products on offer will increasingly consist of a combination of hardware and software. For example, blades of wind turbines that automatically optimally adjust to the wind speed so that more energy can be generated. There is a danger therefore that companies within the sector which do not invest in the software aspects of their products will incur a considerable disadvantage compared to the competition. An example of a concern that invests substantially in software is General Electric. (GE, see also the article about the energy sector). GE expects that the global market for the ‘industrial internet of things’ will be worth $225 billion in 2020. Which equities do we find attractive? For 2017 we have several preferences within the industrial goods sector. We still find conglomerates (large, complex corporations) attractive. They improve themselves by increasing their profit margins, reducing costs or disposing of divisions that are not part of the strategic activities. These companies can better absorb the gradually cooling Chinese economy and the low commodity prices since they are more diversified than other companies. They also usually have a well-filled order book and offer services that generate recurring revenue. An example of a company that meets these conditions is GE. It is officially included within the multi-industry sector of large industrial companies that operate in diverse end markets with various divisions. Thus GE for example produces equipment for the oil and gas industry as well as medical devices. The percentage of investment analysts that are currently (early November) giving a buy recommendation for companies in the multi-industry sector is at its lowest level since 2009. FedEx benefits from growth in e-commerce Another attractive sub-sector in 2017 is that of the courier services. These companies benefit from strong growth in e-commerce (online shopping). One such company is FedEx. We not only find FedEx attractive in view of the growth of the webshop market, its cost savings, its pricing power, the integration of the acquired company TNT and the lower price-earnings ratio, but also its higher earnings growth relative to competitor UPS. Deere: high return on equity Within the machinery sub-sector we also consider forestry and agricultural machinery manufacturer Deere to be interesting. Deere, well-known for its tractors, makes optimal use of the developments in the sector. Fewer machines are being sold to farmers due to the low prices for grain and other crops. But the cost savings, investment in research and product development and the share repurchase programmes are effective steps by the management to make Deere a stronger company and create shareholder value. In addition, Deere has pricing power and the company achieves high returns on equity. Commodity prices may also rise again Commodity prices may still produce positive impulses for the sector. A widely used commodity index, the CRB Commodity Index, is now just as low as its low point of 2001/2002. Once there is a turn in the commodity prices trend, for example due to a recovering global economy or strong growth in emerging markets, this could have a positive effect on several sub-sectors within industrial goods. 33 David Wolters investment analyst Energy sector Big data on oilfields just as interesting as the oil itself A higher or lower oil price means the difference between profit or loss. Technology aspects are also increasingly decisive. In addition, software can produce improved efficiency. And thus more profit. Oil price is crucial for the entire sector Oil and gas prices strongly influence the profits of companies in the energy sector. It is therefore understandable that their profits are much lower than two years ago. Oil prices have fallen sharply since then: in June 2014 the oil price was still above $100 per barrel. In mid-November 2016, at the time of writing this, the price of a barrel of oil is fluctuating around $45 (both WTI and Brent quality). The OPEC meeting on 30 November 2016 will be important for the sector since it will then be revealed whether the various members of this cartel organisation are able to make agreements about production cuts. The members have already indicated that they want to produce less in order to support prices by reducing supply and thus generate extra income. The entire energy sector has already been under considerable pressure for some time due to the low oil prices. In recent years, thousands of people have been laid off in order to reduce costs and oil company investments have been cut by billions of dollars. Meanwhile, the demand for oil is estimated to grow this year by 1.2 to 1.4 million barrels. At the moment, there is still more oil being produced than is actually needed. We expect that this effect will decline in 2017. 34 Corporate profits in the energy sector uncertain due to oil prices The energy sector includes major oil companies like Shell, ExxonMobil (Exxon) and BP, which have both an upstream division (for pumping up oil and gas) and a downstream division (refineries, petrol stations). In addition, this sector also includes companies that focus only on the pumping up of oil and gas, and companies that only refine. Oil service providers (or oil service companies) also belong to the energy sector. These supply, for example, cranes for oil rigs or specialist knowledge for the offshore drilling for oil, sometimes at a depth of many kilometres. Examples of oil service providers are Schlumberger and Fugro. As already stated, the profits of oil companies are currently under pressure due to the low oil prices. Consequently, less is being invested in exploration and production, with the result that the profits of oil service providers have also fallen dramatically. Some are making a loss. For companies with a strong balance sheet, there are thus opportunities for acquisitions. Oil services and big data We think it is increasingly important for companies in the oil service sector to combine software and hardware. The reason is that the All oil wells in the world connected to the industrial ‘Internet of Things’ work performed by oil service providers in the oil fields generates enormous amounts of data. This data can be utilised much better by making use of one software platform. The large industrial conglomerate General Electric (GE), which also has an energy division, for example, and BP have signed an agreement to connect all oil wells worldwide to the industrial ‘Internet of Things’. With GE’s data management software, the technical specialists on BP’s oil rigs gain real time global access to equipment and operational data. This allows better decisions to be taken, for example regarding the risks. Preference for 2017: major oil companies, secure selection of oil services Within the energy sector, we have a preference in 2017 for the ‘super majors’ and also look selectively at oil service companies. The super majors are very large concerns that have both an upstream and downstream division, such as BP, Chevron, Exxon, Total and Royal Dutch Shell. Within the group of super majors, we prefer companies with a strong free cash flow, a healthy balance sheet and a large downstream division. Despite the fact that the results of the downstream divisions are also under pressure, the downstream division within these concerns typically creates a buffer against poor results in the upstream division. An example of a super major that meets these conditions is Exxon. Within the oil service sector, we find Schlumberger an attractive company. The recently announced merger of General Electric’s oil and gas division with service company Baker Hughes also offers opportunities. Within oil services it is important to choose companies with a strong market position, good free cash flow, a strong balance sheet and that make the right strategic choices. Schlumberger, for example, also invests in software. 35 Eric de Graaf investment analyst Healthcare Research and product development offers the possibility of considerable profits The healthcare sector is struggling. There are currently no signs of strong earnings growth. But those who successfully introduce medicines onto the market can still earn billions in profits. 36 In view of limited earnings growth, no strong sectorwide recovery in investment results is expected In 2016, the healthcare sector was – in contrast to previous years – one of the worst performing equity sectors on the stock market. The pharmaceutical companies sub-sector, accounting for more than half of the sector's market capitalisation, also lagged way behind. Prices in this sub-sector remained under severe pressure until the US presidential election. This was partly due to statements made by presidential candidate Hillary Clinton about pharmaceutical pricing policies and her promise to do something about them. In the past a recovery usually occurred after the elections because real intervention was not forthcoming. That was also the case this time following the victory of Donald Trump, but the expected limited profit growth in the coming years does not provide enough room to expect a strong recovery. The price development of the various pharmaceutical companies differs significantly, however. This is mainly due to differences in the product pipeline: successful new drugs can still generate billions in profits. Confidence in biotechnology completely evaporated During the past three years, the equities of companies in the biotechnology subsector have on average produced nearly twice as much return as the MSCI All Country World Index (source: Bloomberg, 31 October 2016. This return was, however, entirely realised in 2014 and 2015. The share prices of biotech companies have now already been under pressure for more than a year as a result of discussions about the high medicine prices and their long-term sustainability. It is striking that especially the larger biotech companies have been punished on the markets for this and have seen a sharp fall in their prices. Their shares have now consequently acquired a very low valuation in comparison with equities from other sectors. Medical devices: limited growth and consolidation as a solution The average valuation of shares of manufacturers and suppliers of medical equipment is at its highest level in almost a decade at the end of 2016. The most important causes of this strong price performance are the consolidation that is taking place and the ‘defensive’ qualities of this sub-sector: even in economically difficult times, there remains a clear need for care and medical equipment. Thanks to economies of scale as a result of the many mergers and acquisitions, the average profits growth can increase. In the coming years we expect even more consolidation, but anticipate only limited financial scope for companies to repurchase their own shares. Given the above average valuation, in 2017 we do not expect any outperformance by this sub-sector relative to the performance of the average equity market. Medical service providers: pricing tests investor confidence The medical service providers sub-sector, whose activities – such as the provision and delivery of medicines – almost exclusively take place in the United States, shows only limited underlying growth in turnover and profits. Acquisitions of smaller players are a proven means of increasing scale and thus reducing the costs per prescription or administered medication. In this subsector, we therefore expect further consolidation, with parties such as Express Scripts, CVS and UnitedHealth increasing their market share and continuing to grow in that way. An additional point of attention has been that a number of these companies have been the subject of adverse news coverage with their pricing policies for certain medicines. This puts investor confidence to the test. 37 Eric de Graaf investment analyst Information technology Market leaders set the standard and perform better than average There are major differences within the information technology sector: the market leaders continue to perform better than their competitors. And for the time being little will change. Each sub-sector has winners and losers In 2016, as in recent years, equities from the information technology sector have on average performed extremely well. However, this is certainly not evenly distributed across all sub-sectors. Software companies, for example, have clearly done much better than hardware manufacturers. There are also large differences in price performance within the subsectors, with the market leaders often doing better than average. Such differences will also continue in the future, as there are often specific winners and losers in each sub-sector. Growth in automotive and industrials sub-sectors, limited growth at most for PCs and smartphones Many initiatives have been presented in 2016 that could in the long term constitute a significant part of the turnovers in the hardware segment and thus ensure growth. Examples include selfdriving electric cars, all kinds of robotic applications and virtual reality. New growth markets are also badly needed because the PC market again showed a decline in 2016. We expect limited contraction to be the norm in coming years. Consolidation is therefore taking place throughout the chain in order to reduce the 38 costs per product by means of an increase in scale. The growth in smartphones sales is also decreasing steadily since global saturation is occurring. The negative effects of problems with specific models, such as the Samsung Note 7, whose battery sometimes appeared to burst into flames, can also play into the hands of manufacturers like Apple. The smartphone market is starting to saturate Cloud software, advertisement sales and content also growth engines in 2017 Software companies have in recent years made many investments aimed at a growing presence in the cloud. It was therefore not surprising to see impressive growth rates from key players in this field, such as the figures from Microsoft, Alphabet (the parent company of Google) and China’s Tencent. Also the shift from traditional advertising budgets to online advertising is continuing at an accelerated pace. A company like Facebook, for example, can greatly benefit from this. The production, offering or purchase of content (such as music, series and films) is also a common denominator of the companies that we consider the most promising in the coming years. IT service providers: cautious growth, but also fundamental changes After years of decline, the IT services sub-sector is likely to show slight profit growth again in 2016. The larger companies have prepared themselves for this recovery by means of selective acquisitions and cost optimisation. In the short term we anticipate possible pressure on the growth and profitability of companies in this sub-sector due to the expected negative effects of the Brexit on the European economy. We do not expect any improvements in the long term either. Due to the shifting of operations to external cloud services there is less demand for IT specialists, who are often hired in from external IT service providers. We therefore do not expect profit margins, and thus stock market valuations, to return to historically high levels. Marina Hagoort investment analyst Telecommunications companies Providers with their own network benefit from rising data usage The demand for faster fixed and mobile internet continues to increase. What is more, customers will purchase more and more online content (‘streaming’). Telecommunications companies with their own fibre-optic network and licences for mobile internet have a competitive advantage in this respect. Demand continues to grow for fast internet as well as infrastructure supervision More and more devices are connected to the internet. These include smart thermostats, selfdriving cars and smart TVs. Together they form the ‘Internet of Things’. Due to the every increasing role played by the Internet of Things in our way of life and the emergence of technologies (such as virtual reality), we expect that the demand for faster wired and wireless internet will continue to grow strongly. It therefore seems logical that investments in telecom networks that make use of the latest technologies will yield a positive return. 39 It is assumed here, however, that the providers making these investments have the freedom to operate their networks in a manner that suits them best commercially. But precisely because of the growing importance of data communication in our society, policymakers and regulators are ever more intensively involved with the internet infrastructure. Acceleration of 5G development in 2017; stimulus in the EU The availability of 5G is essential for achieving the ‘Digital Single Market’, one of the highest priorities of the European Union (EU). In its 5G Action Plan presented in September 2016, the European Commission (EC) announced that it will work together with Member States and industry stakeholders to ensure that full 5G capability is available in all urban areas and on major roads and railway lines in the EU by 2025. To this end, many tests will be performed from 2017. The EC also announced the objective of the European telecom companies to offer full 5G capability (on a commercial basis) in at least one city in each Member State by 2020. 5G is also being developed in most other telecommunications markets. The US telecoms group Verizon, for example, hopes to already start offering 5G on a commercial basis in the United States in 2017. Verizon wants to already start offering 5G in the US in 2017 40 Content and fast internet mutually stimulate consumption By offering packages with various combinations of telephony, internet and content (such as series, sports reports and games), providers are trying to better meet the needs of customers. Moreover, the availability of attractive content encourages customers to consume more and more data. If customers stream more content, their demand for (ultra) high-speed internet increases. The availability of fast internet also makes it more attractive to purchase content. Fast internet facilitates a higher picture and sound quality and improves the reliability of the connection. Telecom providers with their own network have a competitive advantage With the increasing demand for data, telecom providers with their own fibre-optic networks (for fixed high-speed Internet) and 4G spectrum licences (for mobile internet) have a competitive advantage. They are able to offer unlimited internet with the highest speed, without incurring variable costs. Internet service providers without their own network or spectrum licences must purchase the internet use elsewhere. Their costs therefore rise as data usage increases. Friso Rengers investment analyst Commodities Surpluses and excess capacity lead to stagnating prices In our opinion, a new commodities boom is not to be expected in 2017. The prices of some commodities may temporarily rise substantially, but it is still too early for enduring enthusiasm about the entire commodities asset class. Higher prices but still no improved market The production capacity for many commodities has risen sharply all over the world in recent years due to investments in, for example, mining, agricultural land, energy production, means of distribution and processing and refining techniques. These investments were based on forecasts for strong global economic growth. Although this growth is increasing, it is nevertheless lower than expected and there is overcapacity and many product surpluses. In addition, technological changes are leading to more effective production and to less rapidly growing demand for commodities. 41 Development of commodities index (in euros) Source: Thomson Reuters Datastream, November 2016 Efficiency drive through new technology The use of new technologies has implications in many different fields within the commodities sectors, including the extraction of shale oil and gas; the growth of wind and solar energy partly due to more efficient technology; the application of genetic engineering to crops; the massive expansion and modernisation of the ore processing industry and the mining industry. 42 All these technological developments have made significantly increased production volumes possible. This subsequently leads to lower costs per unit of product. The efficiency drive is furthermore not confined to the production of commodities. Also on the consumption side, technological developments are helping to reduce the unnecessary use of commodities. Development of commodities index (in euros) Source: Thomson Reuters Datastream, November 2016 What to expect in 2017? The world economy may return to higher growth rates. In that case, the demand for commodities will pick up further. But as an investor in 2017 can you already expect good returns from this asset class? From a historical perspective, commodities are not expensive, and this asset class can provide a greater diversification of risks in addition to equities and bonds in an investment portfolio. Nevertheless, we see no reason to assume a long-term trend of price increases since producers for the time being have sufficient resources and capacity to meet the growing demand for commodities. Furthermore, they are focusing on growth and on lower costs. This leads to price competition and overproduction and thus has a dampening effect on price increases. Our outlook for commodities remains neutral. 43 Want to know more? Do you want personal contact or have questions about your investment portfolio? Your Private Banker or Private Wealth Manager will be happy to assist you. If you do not have a contact at ING, call Rob Oomens on 06 3400 4800 to make an appointment. United States of America (i) UNDER NO CIRCUMSTANCES SHALL THE INFORMATION IN THIS DOCUMENT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION TO OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF ANY SECURITIES AS DESCRIBED IN THIS DOCUMENT SOLD IN THE UNITED STATES OF AMERICA OR ANY OTHER JURISDICTION WHERE SUCH AN OFFER OR INVITATION OR SALE WOULD BE UNLAWFUL. 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ANY ENTIRE OR PARTIAL FORWARDING, DISTRIBUTION OR REPRODUCTION OF SUCH INFORMATION IS NOT AUTHORISED. NON-COMPLIANCE WITH THESE GUIDELINES MAY LEAD TO AN INFRINGEMENT OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS OF THE UNITED STATES OF AMERICA. (iii) BY OPENING THE PDF FILE OF THIS DOCUMENT OR OBTAINING IN ANY OTHER FORM THE INFORMATION IN THIS DOCUMENT, YOU STATE THAT YOU ARE NOT A 'US PERSON' AND THAT YOU ARE NOT LOCATED IN THE UNITED STATES OF AMERICA, ITS TERRITORIES AND POSSESSIONS, ANY STATE OF THE UNITED STATES OF AMERICA OR THE DISTRICT OF COLUMBIA AND THAT YOU ARE AUTHORISED TO RECEIVE THE INFORMATION REFERRED TO IN THIS DOCUMENT. Disclaimer This investment recommendation was prepared in Dutch by the ING Investment Office, Amsterdam and issued by ING Bank N.V. on 29 November 2016 at 11:30 a.m. This English translation was prepared on 14 December 2016. 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