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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.
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publication. Information in this publication may be used
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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
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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.
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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.
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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.
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This investment recommendation was prepared in Dutch by the ING Investment Office, Amsterdam and issued by
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