Investment Outlook Update 2017

Time to switch

Equity prices have been rising for months without any significant decline. But eurozone government bonds fell sharply at the beginning of this year. Technology and smart software continue to play a decisive role in many sectors. Other important themes remain ‘sustainable’ and ‘online’. Will equity prices continue to rise?

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Economy in a higher gearMacroeconomics and market developments

Higher interest rates affect all strategiesING investment strategies policy

Analysis of asset classes

Pace of appreciations will fall

Powerful sequel to long-term bull market equitiesTechnical analysis

Limiting CO2 emissions high on the agenda since climate agreement

Sustainable investment

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Sectors

Consumer Discretionary

Utilities

Industrials

Information Technology Services

Consumer Staples

Financials

Energy

Telecommunication Services

Materials

Real Estate

Health Care

Commodities

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At the end of last year many investors thought that fiscal policy (government investments and tax cuts) had to take care of further economic growth. And thus also higher corporate earnings. It was therefore no wonder that investors became enthusiastic immediately after the election of Donald Trump. After all, he had announced during his campaign that he would invest heavily in infrastructure and reduce the tax burden. Up until now, few actions have been taken by the White House, and it appears that managing a country is more difficult than managing a company. Considering his concrete results so far, we expect that it will take some time before Trump’s plans will actually be implemented. Also elsewhere in the world, there have only been promises for the most part.

Economic growth in the Netherlands in the first quarter was 3.4% on an annual basisAre we then already disappointed with 2017? Not really. Economically, the world is doing pretty well and we expect increasing growth compared to 2016.

Despite all the (temporary) geopolitical concerns, including those about the elections in France and the Netherlands, this year’s macroeconomic figures have been encouraging up until now. Especially in the eurozone there is a positive economic momentum because economic growth in the first quarter has substantially increased. Look, for example, at the growth in the Netherlands, which was 3.4% year-on-year in the first quarter.

Greater confidence, higher profitsThe high level of consumer and business confidence has translated into higher spending, investment and profits. The eurozone economy grew in the first quarter by 0.4% (quarter on quarter). This was clearly higher than, for example, the growth in the United States (0.3%) and the United Kingdom (0.2%). Despite the high levels of confidence in the US, consumer spending was very disappointing. On the other hand, China’s growth (6.9% on an annualised basis) was stronger than expected. The fear of Trump’s strong protectionist policies, and thus sharply declining

Macroeconomics

Global economic growth is continuing, even though governments are doing little to take the baton of the central banks’ stimulus. But that does not appear to be so unfavourable: there is a threat of overheating in the US.

Economy in a higher gear

Simon Wiersma Investment Manager

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world trade, has so far proved to be unjustified. This is also especially favourable for emerging markets. We therefore maintain our expectation of an increasing difference in economic growth between emerging and developed markets, in favour of the latter.

Equity prices benefit from central bank policyGlobal equity prices are still on the rise. One reason for this is the macroeconomic figures that were on average better than expected. In addition, the positive sentiment on the stock markets was supported by better than expected corporate quarterly figures. Many stock market indices are therefore much higher than at the time our annual outlook was written. A large number of indices are even close to or at record levels. (You can read about our expectations for returns in the article ‘Analysis of asset classes’.) Furthermore, the central banks are still pursuing accommodating policies and there is no lack of capital (‘liquidity’) on the financial markets. And because there is still hardly any increase in inflation outside of the US, we do not expect this situation to quickly change.

Risks: weakening growth in China, the US or a change in central bank policyWhat are the risks with respect to our economic scenario? In our opinion, this could mainly be weaker-than-anticipated growth. The Chinese economy may cool down more than expected, or the expected

strong upswing of the US economy may take longer, following the weak first quarter. On the other hand, there is a real chance that growth in the eurozone will be higher than expected. In addition, there is a risk that the US central bank (the ‘Fed’) or the European Central Bank will ‘taper’ more quickly than expected (thus pare down its quantitative easing). We do not think this very likely, however.

More volatility expected in the second half of the yearAs we already wrote half a year ago, it may take some time before we can expect a political economic impetus. At the moment, we consider this to be more advantageous than disadvantageous for the stock markets. The risk of overheating has thus decreased. In addition, the current upward phase of the economic cycle may take longer, especially if government incentives appear at a later date. The financial markets have quickly priced in the positive scenario, leading to an increase in equity prices. Our annual targets for the returns of the various asset classes have already been achieved, and there was hardly any period of decline in the first months of 2017. For the second half of the year we do not expect that this trend can continue. We believe there will be more stock market volatility. We are therefore positioned rather more cautiously than half a year ago and currently maintain a neutral equity weighting.

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Investment strategies policy

The policies for ING’s investment strategies are broadly consistent, with for example an underweighting of government bonds within bonds and the neutral position of marketable securities vis-à-vis fixed-income secu-rities (at the beginning of June). But the strategies do have different em-phases and idiosyncrasies.

Higher interest rates affect all strategies

Actueel strategy: wide spread with emphasis on technologyThe 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 increasing growth of emerging markets, both within equities and bonds. Government bonds, corporate bonds and real estate are also fixed elements of the broadly diversified investment strategy. At the beginning of June, however, we maintain an underweight of government bonds, given our expectation of slightly higher bond yields.

Duurzaam strategy: more than just climate changeOur Duurzaam investment strategy encompasses socially responsible investment. Certain activities and conduct are ruled out as an investment opportunity, for example the production of tobacco and the use of child labour. We also make targeted investments based on current sustainability issues

like climate change. Companies that contribute to solutions, such as the production of wind and solar energy or increasing energy efficiency, are strongly represented, both with 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: preference for emerging marketsOur Comfort* investment strategy is characterised by a broad spread across various asset classes and regions. With both equities and bonds, we currently have a preference for stocks and bonds from the emerging markets region. In addition, within the bond class, we 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 predominantly have a short residual maturity. Sensitivity to changes in the market rate of interest is consequently limited. After all, rising interest rates mean falling bond prices.

H. van Heijster, N. Levy & F. Rengers Investment Managers

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Dynamiek strategy: wide spread across investment themesOur Dynamiek* investment strategy also has a broad spread across various asset classes, regions, business sectors and investment themes. With both equities and bonds, we currently have a preference for stocks and bonds from the emerging markets region. The most important theme is technology, not only in the information technology sector, but also in financial assets, for example. In addition, within the bond class, we 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 predominantly have a short residual maturity. Sensitivity to changes in the market rate of interest is consequently limited. After all, rising interest rates mean falling bond prices.

Inkomen strategy: emphasis on EuropeThe focus in our Inkomen investment strategy is on interest income and dividend yield. We invest primarily in defensive equities. The geographical spread focuses on Europe. This makes the exchange rate risk vis-à-vis the euro of this investment strategy slightly lower than that of our other investment strategies. Government bonds currently have an underweight position in favour of higher yielding bonds, which we use to a limited extent to generate more interest income. Furthermore, the bond portion

has a short average remaining maturity. Sensitivity to changes in the market rate of interest is consequently lower. In view of our expectation of greater price volatility, we have currently given equities a neutral weighting in our tactical asset allocation.

Index strategy: index-tracking investment with global diversification and tactical policyThe Index investment strategy consists entirely of index trackers. The policy is to invest in cost-efficient ETFs (‘exchange traded funds’: trackers with continuous listings) and good quality index funds. The Index strategy follows the tactical asset allocation that we also apply to our other investment strategies. Government bonds have an underweight position in favour of higher yielding bonds, which we use to a limited extent to generate more return. Furthermore, the bond portion has a short average remaining maturity. Sensitivity to changes in the bond yield is consequently lower. In view of our expectation of greater price volatility, we have currently given equities a neutral weighting in our tactical asset allocation.

*) Available only for ING Private Banking customers

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Analysis of asset classes

In the second half of the year we expect more volatile markets and fewer price increases. We have therefore reduced the risks in our investment strategies somewhat.

Pace of price increases will fall

Up until now, our positive return expectations from the end of 2016 have been quite accurate. Many equity indices are at or close to record levels. Our annual targets for the returns of the various asset classes have been largely achieved. We do not expect equity price increases to continue at the same rate in the second half of this year. We are also expecting slightly more volatility than in the first half of 2017. That is why we reduced the weighting of equities earlier this year from overweight to neutral.

Central banks’ flow of funds not yet cutThe optimism of investors in the final months of 2016 continued in the first months of this year. The political tensions, for example concerning the Dutch and French elections, turned out to be less important than the positive economic developments in the largest part of the world. Furthermore, central banks do not appear to be in a rush to ‘turn off the money tap’ (end the stimulus operations). Also, bond yields have not increased everywhere, which many analysts had assumed.

Global equity index has already risen considerablyBetter than expected economic growth figures and business results for the first quarter of 2017 have led to higher equity prices. This is despite the absence of effective policies by the Trump government up until now. Measured in local currencies, the MSCI All

Country World Index (including emerging markets) had already risen by more than 9% at the end of May. That is already more than the 5% we expected for the whole year. In euro terms, however, the rise in stock prices is much less spectacular with a profit of slightly less than 4% then remaining. This is to a great extent associated with the weakening of the dollar. This currency depreciated almost 5% versus a basket of currencies from the United States’ major trading partners.

Higher interest rates expected in the USOne of the causes of the weaker dollar is that the hope of rapid tax reforms and incentive measures by President Trump has up until now proved to be false. Furthermore, economic growth in the United States (US) was disappointing in the first quarter and many commodity prices dropped. And because inflationary expectations have declined, US bond yields are now lower than at the end of last year. Thus, for example, the 10-year US interest rate was 2.28% at the end of May. Nevertheless, we expect the US central bank, the ‘Fed’, to increase policy rates further as tight conditions on the labour market increase further. Due to wage increases, the demand for labour may after all fuel inflation, against which the Fed can respond with a higher short-term interest rate. In response, interest rates on long-term (10-year) government bonds will increase towards 3%.

Simon Wiersma Investment Manager

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Capital loss on eurozone government bondsInvestors in eurozone bonds were, as we expected, confronted with rising interest rates on government bonds – and thus with lower bond prices. The government bond index for the eurozone (Citigroup Euro Government Bond Index) has so far shown a loss of 0.9% in 2017. The eurozone economy is performing better than expected and the political risks have diminished. The pressure on the European Central Bank (ECB) to pursue a slightly less expansionary monetary policy is expected to increase. We therefore think that interest rates on government bonds will increase further by the end of this year and that the yield curve will become steeper. We therefore maintain, as was the case half a year ago, an underweight of government bonds vis-à-vis other bond types in our investment strategies. We prefer bonds with a short duration (average remaining maturity). This reduces the interest rate sensitivity within the fixed-income part of the investment strategies. We may not be able to prevent a capital loss on government bonds, but we can reduce this to a great extent.

Emerging markets bonds and equities on the riseWith a somewhat overweight position in risky bond classes (such as emerging markets debt and high-yield bonds), we can expect to realise a positive return on fixed-income investments. The reduced fear among investors of US protectionist policy, of sharply rising capital market rates and of a stronger dollar has so far this year translated into excellent returns for stocks and bonds from emerging markets. Emerging market equities have clearly performed better than developed market equities. For the time being we are therefore maintaining the ‘overweight’ of this equity region in our asset allocation, which we have had since October 2016. Good earnings growth prospects and an attractive valuation continue to be positive factors. In addition, these equities generally perform well when the global economy is growing,

as is now the case. We increased the weighting of emerging markets debt (EMD) in April from neutral to overweight. At the same time, we have reduced the substantial overweight of high yield corporate bonds (HY) to a rather more modest overweight. We have increased our yield forecast for EMD for the whole of 2017 from 5% to 6%.

Analysts on average expect more profit growth than we doOn the other hand, we consider US stocks to be relatively expensive compared to analysts’ expected profit growth. We maintain an underweight for US equities. The strong, and generally better than expected, first-quarter figures have not only resulted in higher stock prices but also in higher profit expectations for 2017. Analysts now expect an average growth of 14.4% for equities with a global spread. We think this is too optimistic, but are nevertheless raising our profit growth expectation from 7% to 9%. In line with this, we are increasing the expected return on equities from 5% to 6%. Since equity prices have already risen sharply in the first months of 2017, we see little leeway for further price increases from current levels. Within the equities category, we prefer companies that can benefit from a further increase in growth: so-called cyclical equities. Examples are equities from the information technology and financial assets sectors. With emphases on such types of equities, we try to achieve a slightly higher return than the market average.

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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. 'LC' stands for local currencies.

Source: ING Investment Office, 1 June 2017

Expected and year-to-date returns 2017

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Tactical asset allocation as at 10 May 2017

Source: ING Investment Office. This

is our tactical asset allocation as at

10 May 2016. Our current

allocation can be found in our

Monthly Investment Outlook.

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Technical analysis

In recent years, within the rising long-term trend, major corrections occurred on the equity markets each year. But this year, these have not yet been forthcoming.

Powerful sequel to long-term bull market equities

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 outlook. ING’s investment strategies are mainly established on the basis of fundamental analysis.

Bas Heijinktechnical analyst

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Will there still be any corrections in 2017?The rising long-term trend in the AEX index that started in 2009 started a new phase at the beginning of this year. In March, the index broke through the 510-point mark, its top in 2015. This was my first target for the first half of 2017. But contrary to my expectations, this was not preceded by any corrective movement. The market was overly positive (‘euphoric’) in the first months of this year, with technical signals, which could have pointed to the start of a correction, repeatedly being rectified within a few days.

‘Too steep’ increase, but AEX target for 2017 remains at 564We must return to the beginning of 2015 to find an equally strong increase phase without corrective counter-reactions. The rising short-term trend from the December bottom at 445 is too steep from a technical point of view. Also in April and early May, the technical indicators still pointed to market fatigue. The following correction will occur sometime; the question is only: when? My ultimate target for 2017 remains without change the 2007 top of 564. But before such a target is reached, I believe it very likely that there will be a number of stronger counter-reactions since an upward trend is determined by the successive, repeatedly higher bottoms, which indicate the floor of the trend channel. And these bottoms are once again the result of corrective counter-reactions.

Euro-yen rate: reversal in favour of the euro Since the 2014 top of 150 there has been a declining trend in the euro-yen rate. In the summer of last year, it reached a low of 110. At the end of last year, there was a strong breakout through the declining resistance line in the long-term picture, a clear sign of a reversal. Following the formation of a top at 123.50, it returned to approximately 115 in April. This can

be regarded as a correction to the former declining long-term resistance line and the formation of a first higher medium-term bottom. I expect a further increase of the euro in relation to the yen. The first target is at 128. But I also think that an increase to 136 - 137 is possible this year.

AEX Index Source: Reuters Metastock XIV, 29 May 2017

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Euro-dollar rate: no change in broad sideways trendThe euro-dollar rate is in a ‘sideways’ phase. This currency pair has been moving within the limits of a horizontal band ever since 2015. Its bottom lies within the 1.04 – 1.05 zone, while its top can be found at 1.15. A new trend only starts in the case of a structural lock-in beyond these limits. Exactly one year ago, the euro-dollar tested the top of its bandwidth, after which a declining medium-term trend began. This movement resulted in a test of the

bottom of the bandwidth at the beginning of this year.

At the end of April, the resistance line, which had been falling since April last year, was broken with a gap. A buy signal in the medium-term picture. For the coming months the chances are that a further increase to between 1.13 and 1.15 will follow. But as long as the outer limits remain intact, the long sideways trend also remains intact.

Euro-yen rate Source: Reuters Metastock XIV, 29 mei 2017

Source: Reuters Metastock XIV, 29 May 2017Euro-dollar rate

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Oil price (WTI)

Oil price: there is still a lot in the barrelThere is still a lot of upward potential in the barrel for the WTI oil price. At the beginning of 2016, we increased our technical outlook to positive after the oil price at $30-$32 had broken through the long-term declining resistance line. The large inverse head and shoulders pattern (a positive pattern) has now also been completed above $51. The top of 2017 up

until now is $55. The target that is calculated in the long-term picture (based on the inverse head and shoulders pattern) is $74 and the first target for this year is $62. The fall in oil prices in March and April has led to higher bottoms in the medium-term picture. The technical medium-term picture weakens below $42.

Dutch 10-year yield: strong upward continuation with a lot of potential stillThere has been a strong follow-up to the upward breakthrough in the 10-year yield on Dutch government bonds. In the last quarter of 2016, the 10-year yield broke through three important declining resistance lines, pointing to a clear reversal. In the end, an important bottom was created just below 0%. With a top in 2017 (up until now) at 0.77%, the 10-year yield has already quickly reached our first target of 0.54%. The following point lies at 0.88%, but I think

the chances of a further continuation to 1.25% this year are still realistic. In this chart too, a very large inverse head and shoulders pattern was positively completed this year. The new rising medium-term trend still has to take shape however, but this is a process that does take time. The recent decline to 0.41% may have produced the first important higher medium-term bottom. This will only be visible in time**.

Source: Reuters Metastock XIV, 29 May 2017

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Dutch 10-year yield

Important InformationThe 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.

DisclosureThis 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.

DisclaimerThis 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 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.

Source: Reuters Metastock XIV, 29 mei 2017

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Sustainable investments

Climate change and the transition from fossil fuels to renewable energy remain high on the agenda despite the different voice of President Trump.

Transition to sustainable economy is progressing steadily

The rate of energy transition is continuing steadily. The opinions and measures announced by US President Donald Trump do little to alter this. Not only governments, but also companies want to make a positive impact on people, the environment and society. They formulate sustainable goals in line with the United Nations (UN) Sustainable Development Goals (SDGs).

Trump repeals Obama’s climate plan by decreeMany countries and companies are taking measures to implement the Paris climate agreement. However, in the United States, there has been a different voice since President Donald Trump’s appointment. He wants to put an end to what he refers to as the ‘war on coal’. To this end, he has signed a decree to undo Obama’s climate policy. An element of Obama’s policy is the so-called Clean Power Plan, which aims to reduce greenhouse gas emissions by coal plants.

Not only does Trump want to revoke the Clean Power Plan, he has also indicated that he wants to withdraw from the Paris climate agreement. Although it is not yet certain whether he can go through with this, he can refuse to put US commitments into practice. Several countries have criticised Trump’s position. The countries of the European Union, China and

India have indicated that they want to continue with climate measures.

Oil companies support climate agreementSeveral major oil companies, including Shell, BP and Exxon, have also indicated their support of the Paris climate agreement. Exxon, for example, has sent a letter to the White House, requesting that it continues to cooperate with the implementation of the climate agreement. Although the above-mentioned oil companies are still heavily dependent upon oil, LNG gas has become an important part of their turnover. Gas is considered to be the least polluting fossil fuel, while coal is the most polluting. By concentrating on the relatively climate-friendly gas, these companies hope to be able to play a role in the transition to renewable energy.

Renewable energy share continues to increaseThe share of renewable energy in total energy production has already been increasing for years. It is the fastest growing form of energy. This trend is expected to continue, assisted by technical developments and cost reductions. In its Energy Outlook 2017, the oil company BP also states that renewable energy will continue to grow the fastest and that its market share will quadruple over the next

Jochen Harkema and Peter Tros Sustainable Investment Analysts

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twenty years. The International Energy Agency (IEA) expects that nearly 60% of electricity generation will come from renewable sources in 2040. 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 price competition so that these companies have been unable to convert large sales volumes into higher profits.

Other themes are also important, SDGsSince the climate agreement in Paris, climate change has become the main theme of sustainability. However, sustainability is not just about climate change and renewable energy - other issues also deserve our attention. These include good corporate governance, good working conditions throughout the chain (thus also including suppliers) and environmental pollution. The UN’s sustainable development goals (SDGs) can help companies to set a sustainable course. The sustainable development goals help to guide companies and other parties towards a more sustainable world since they are a good way of making a company’s sustainable activities more tangible and thus more measurable. We see that more and more companies are integrating these goals (SDGs) into their corporate policies. Not only are existing activities converted into the SDGs, but the SDGs also make it easy for a company to address a goal and develop relevant activities. This is also in line with consumer expectations about corporate sustainability and among investors about a higher impact of their investments.

‘Impact investing’ is becoming increasingly popularImpact investing, a form of sustainable investment that imposes demands on the effects of investments, is becoming increasingly popular (source: GINN – Annual Impact Investor Survey 2016). Such aninvestment must aim for financial return, but also have a measurable positive effect on people, environment or society. This includes for example investing in a micro-credit fund that allows small entrepreneurs in developing countries to start or expand a business. Another example is investing in sustainable (thus renewable) energy. Among other things, the percentage decrease in CO2 emissions should then be determined. More and more opportunities are emerging for investment with impact. For a long time this was only possible with unlisted investments, such as venture capital

or private equity. Fortunately, more and more investment funds are offering the possibility to invest in equities or bonds that combine the pursuit of financial return with a direct positive impact on non-financial factors. In addition, listed companies are increasingly able to measure and publish the impact of their activities on people, environment and society.

We take account of impact in our selectionIt can be difficult for investors to determine whether (and how) companies have a positive impact. The previously mentioned SDGs can help with this. We also look at the impact of companies, including their CO2 emissions. We have compared the ‘CO2 footprint’ (environmental impact due to CO2 emissions) of the companies in the ING Duurzaam investment strategy with the average emissions of the companies in the benchmark for equities, the MSCI World Index. This shows that our Duurzaam Select strategy has a carbon footprint that is 51% lower than that of the World Index. We have also included microcredits and green bonds in the Duurzaam strategy. Measuring the impact of the investments is still quite difficult and is sometimes still unstructured. There is, for example, no obligation for investment funds and companies to publish information about their impact and there are no standards for measuring this. Nevertheless, investment institutions (such as investment funds) and listed companies are becoming increasingly aware of the wishes of investors and stakeholders to measure the realised impact, to publish information about this and to act in accordance with the findings. We would also like to measure the impact of the investments in our Duurzaam investment strategy - and to take this into account in our investment decisions. This is in line with our efforts to combine good financial returns with a contribution to a more sustainable world.

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Consumer discretionary

The sharing economy, but also self-driving cars and the combination of content and networks, are important themes in the durable consumer goods sector.

Rapid innovation in the automotive industry

Sectors

Within equities, we currently have a preference for the financial assets sector (such as banks). We are also positive about the information technology sector. Themes that play a role in many sectors are technological innovation and sustainability.

ING’s outlook by sector

Cor Blankestijn Investment Analyst

As we already noted at the end of last year, car manufacturers finally see the need for polluting fossil-fuelled cars to be replaced as soon as possible with electric models. And that they are preferably, as soon as this is legally possible, also self-driving. Almost all car manufacturers are busy with this and new models are continually being launched. But the enormous investments required for this, which will only yield returns in the distant future, appear to deter investors in car shares. As in 2016, in the first months of 2017, the return on most of the automotive sector equities was negative. This year,

Tesla has to date been the main beneficiary on the stock market. Only Tesla, with a mere 25,000 cars sold in the past quarter, saw its future vision rewarded with a rise in prices (more than 35% in 2017 up until the beginning of May). This was despite the fact that the company is still making a loss. Measured in terms of market capitalisation, Tesla was even one of the largest car companies in the world, bigger than Ford and General Motors. The group is on schedule to be able to produce new, cheaper models in much larger numbers in the future. Tesla is now already rewarded for this. But for the financing of future, innovative

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models, car makers are dependent on the free cash flow from the cars that are currently being sold. And in that respect, we nevertheless rely more on the major German manufacturers like BMW and Daimler (parent company Mercedes), both of which have an operational profit margin of approximately 10%.

Media sector: mergers and acquisitionsThe takeover bid that telecommunications company AT&T issued last year for media company Time Warner, is still in force at the time of writing. Time Warner is known for its highly rated Warner Bros, CNN and HBO divisions, which produce content such as TV programmes, films and series. The deal has not yet been completed, but we still assume it will go ahead. AT&T is already disposing of smaller divisions in order to appease the supervisory authority. There will probably be more mergers and acquisitions in the ‘media’ sub-sector since good content is a strong asset for capturing market share in the consumer markets for telephone and cable services.

The acquisition virus has also infected the remainder of the telecom and multimedia sector, so it seems. Every self-respecting telecom or media company is investigating mergers and acquisitions to avoid being left behind. New media platforms and business models (such as video on demand from Netflix or Amazon) are increasingly replacing old-fashioned linear television viewing. Revenue from this also replaces revenue from telephone services. Walt Disney and Comcast are names that are mentioned. Due to their size, however, it would more likely be a merger than a takeover of one by the other. But the chances are that this will remain a rumour.

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Focus on shareholder value helps to increase sector indexDuring the past few years, companies in this sector were almost only able to grow through online sales. But merger and acquisition (M&A) activity is increasing again.

M&A unexpectedly also a theme in the food sectorAs expected, average valuations (such as price-to-earnings ratios) of companies in the consumer staples sector increased further in 2017. The valuation of some equities has even reached an historic high. This seems remarkable, since the growth of both turnovers and profits has been minimal in recent years (on a comparable basis). The price rises are therefore due to other factors: a greater willingness by investors to take risks and the taking advantage of possible and realistic takeover attempts.

Unilever able to hold on to price gainThe rise in average stock prices in the foodstuffs sub-sector this year was partly due to the takeover bid by US Kraft Heinz for the British-Dutch Unilever. Unilever’s price rose substantially as a result, but the management indicated immediately after the offer that it had no interest in being taken over.

Unilever announced that it could also increase its return under its own steam and within a month produced a strategy update. The group will accelerate divestments, sell less well-performing brands, save a lot on advertising and marketing expenses and ‘sharpen’ its financing. Investors are giving Unilever the benefit of the doubt and its price has remained firm since the strategy update. Almost all competitors are consequently also focusing on profit growth with extra intensity. As a consequence, the consumer staples sub-sector, which was underperforming versus the market (world index) earlier this year is now outperforming it.

New ‘local’ cosmetic brands in Asia growing more strongly than multinationalsMultinational companies can only retain their dominant market share with the correct pricing and marketing policies and with superior quality products. Companies like Nestlé, Procter & Gamble, Unilever, Henkel and L’Oréal have a good name. Many of their products will remain ‘top of mind’ among consumers for the time being. For these big players, cutting advertising and marketing expenses therefore seems to be an easy way to save costs. This may however also work against them. A lot of advertising creates strong enduring brands with the power to raise prices.

Consumer staples

During the past few years, companies in this sector were almost only able to grow through online sales. But merger and acquisition (M&A) activity is increasing again.

Focus op aandeelhouderswaarde helpt sectorindex omhoog

Cor Blankestijn Investment Analyst

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The multinationals referred to have indicated that they are going to cut billions off their advertising and marketing expenses in order to increase profit margins. However, products that are brought less to the attention of consumers with advertising are, in our opinion, over time at risk of disappearing from their minds - and competing local producers benefit from this. This is certainly the case if they are not listed and thus do not have to be afraid of activist shareholders.

Less sugar, healthier lifeThe theme of health has become even more important. At the beginning of March, the Coca-Cola Company surprised friend and foe alike with the

announcement that in the Netherlands it will only sell the sugar-free version of their Sprite soft drink. The other beverages of the group are also gradually becoming sugar-free or low in sugar. Unilever followed with the announcement that it will only be producing a low-sugar version of its popular soft drink Lipton Ice. We have regularly discussed the trend of healthier food and drink in our publications since 2009. Concerns like Pepsi, Coca-Cola, Unilever and Danone realise that consumers increasingly take their health into consideration, whether or not prompted by the advice of a doctor or nutrition expert. However, the prices of these companies have not shown any outperformance this year; their returns remain around that of the average market.

Ample capacity, slight volume growth and the prospect of increasing economic growth result in cautiously positive expectations. The point of attention in the materials sector is the increase in production costs. We can deduce the financial health of companies in this sector from the way in which profit margins develop.

Rising demand creates slightly positive expectations

Materials

Jenny Overman Investment Analyst

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What are materials?In the materials sector, companies actively produce and process raw materials. These include mining firms, chemical companies and manufacturers of building materials and paper. Agricultural products are also part of this sector.

China’s influence on metal prices continues to growAlso in the coming years, the development of metal prices remains closely linked to the health of the Chinese economy since the stronger the economic growth, the more ore and metals that China will import. The plans of the Chinese government to close redundant factories and make production processes more efficient, as well as the planned internationalisation of Chinese metal producers, are important factors in this respect.

Investment policy is an indicatorFollowing a number of difficult years, mining firms from other countries are faced with an important choice. After a period of cuts, repair of balance sheets and deferred investments, they will again have to invest in future capacity in a few months’ time. The way in which the mining firms spend their money can provide considerable insight into their outlook of the state of the economy. If they primarily opt for dividend increases or acquisitions, instead of developing new projects, this may point to deteriorating prospects. We therefore maintain a cautious stance for the time being.

Chemicals markets more balancedCautious volume growth was a bright spot for chemicals companies in the first half of the year. Due to the limited economic growth, it was a challenge to pass on rising commodity prices and energy costs to the customers. Specialist applications of chemicals, for example in catalysts, rechargeable batteries and electronics, offer improved margins and growing sales markets. Surpluses and falling prices in recent years have put pressure on agricultural revenues, and hence the spending on agricultural chemicals and fertilisers. Despite a few small rays of hope, we do not see any lasting recovery in this sector.

The expectation of more investments in infrastructure and housing construction boosted the prices of building material companies in the first half of the year. Due to the moderate economic growth and political uncertainty, these investments are only slowly starting to pick up. Sustainable stimulation of the economy may provide an impetus in the coming years. Furthermore, following a number of years of mergers and acquisitions, synergies, such as efficiency improvements, should become visible at companies.

Slow start investments in infrastucture

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Utilities

The price of electricity is under pressure all over the world. Batteries are now becoming cheaper, appliances are becoming more energy-efficient and the supply of shale gas is increasing. What are the consequences for utility companies? Should they be looking for new partners?

New energy calls for new relationships

Jenny Overman Investment Analyst

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.

More renewable capacity in the energy mix...For 2017 and the coming years, we expect that utility companies that seek to collaborate with one another and with new partners will perform the best. The increase of renewable energy in the energy mix, improvement in storage capacity and smarter energy networks lead to a structural decrease in electricity prices and less need for expensive ‘peak capacity’ from oil and coal power stations. In the US, the increased availability of shale gas results in additional downward pressure on the electricity price.

... leads to the closure of conventional power stationsThe first wind energy contracts without a subsidy on the purchase price for electricity suppliers were recently auctioned in Germany. And in the UK, the grid operator announced the first full working day without electricity from coal since the industrial

revolution. Although we certainly cannot do without conventional capacity in the coming decades, less is required each year. This will accelerate the depreciation on expensive, loss-making power plants and make new conventional projects more risky. The conversion of coal-fired power stations to plants that run on gas or biomass may delay their closure, but not cancel them. Utility companies with more conventional capacity in their portfolio face increased risks.

Most major utility companies have opted in recent years to focus more on activities such

Utility companies must look for a new match with their customers

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as transmission, interconnection and network management. These provide stable income so that they become less dependent upon the sometimes strongly fluctuating market prices for energy. New developments like the electric car and the internet of things will have a major impact on the sector. Companies taking the lead in this can quickly develop a powerful position. By working together with governments, construction companies, car manufacturers, telecom providers and consumers, utility companies can rapidly expand the networks and charging points required by these developments.

The business market as a new partnerNew partners in the construction of renewable energy projects are companies or cooperatives. By making agreements on minimum price and delivery, a project becomes less risky for the utility company. Conversely, the business partner has the certainty of delivery, price and origin. Governments can help by scrapping unfavourable rules or even by participating at the local level. These projects are completely unsubsidised and nevertheless contribute to employment, a reduction in the emissions of harmful gases and the technological development in the region concerned. Although this development is

still very new and currently not possible everywhere, in the US nearly 11 GW of capacity has been acquired in this manner by companies since 2008. Utility companies that are open to new forms of project financing can benefit from this.

Services for decentralisationImproved and cheaper electricity storage would also facilitate the decentralisation of energy generation, thus the generation of electricity at more locations and on a smaller scale. In addition, consumers want to know more about their consumption and the origin of their electricity. Market players that supply the equipment for generating capacity, batteries and related services can benefit from this. The shares of utility companies have defensive characteristics. They pay substantial dividends and are regarded as a safe choice during periods of economic uncertainty and low interest rates. If the economy improves and interest rates rise (as we expect in the coming period), then the short-term outlook for the utilities sector will be less attractive. Within the sector, companies with more growth opportunities, a healthy balance sheet and slightly more risk become more attractive.

Top 10 business customers of renewable energy worldwide in 2016 (MW)

Solar

Wind

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Financials

The financial sector can benefit from various positive trends, which we expect to continue in the second half of the year. Higher interest rates would also be beneficial. In this respect, this sector is an exception compared to most of the others.

Underlying recovery of banks continues

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 underlying operational trends are normalising, the costs of legal proceedings are past their peak and the negative impact of bad banks is diminishing. Positive factors, like a recovery of merchant bank revenue, good cost control, sustained credit growth and a further decline in payment defaults in Europe, were also visible in the most recent results. We expect these trends to continue in the second half of 2017.

Financial sector is well positioned for higher interest rates...The financial sector is in our opinion one of the few sectors that can benefit from further rises in interest rates. Furthermore, the ‘Fed’, the US central bank, will reduce the balance of US government bonds and packaged mortgages in the second half of the year. This may lead to higher market interest rates and a steeper yield curve. This should be positive for the banks, provided that the adverse effects of higher interest rates on the economy remain limited. Higher

interest rates are not only beneficial for the banks’ interest margins, but also for the capital positions of insurers and, in the longer term, for the return on investment portfolios.

...but interest rate hikes may have a negative impact on financial markets and economyThe interest rate hikes in the United States (US) may however lead to a new cycle of credit defaults and adversely affect credit growth, the economy and the financial markets. We believe that this risk will increase in the second half of 2017. Credit growth in the US already slowed in the first half of 2017 and more payment stress was visible on subprime car loans and credit cards.

Financials ready to ‘fire on more cylinders’ but risks are increasingFollowing drastic efficiencies in recent years, the operational trends within the sector are normalising. In addition, further Fed interest rate hikes and rising US bond yields would also be positive for the financial sector, while this would actually have a negative impact on many other sectors. We therefore believe

Jan Kleipool Investment Analyst

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Real estate

In recent years, real estate was a popular alternative for those needing regular income. Government bonds yielded hardly any return. But bond yields appear to be rising again.

Headwind expected from rising interest rates

What is the real estate sector?For its investment strategies, ING only invests in listed real estate (real estate investment trusts, REITs). This can be bought and sold relatively quickly. Rental income is partly distributed as dividend, which makes

real estate more attractive in times of low bond yields. The low interest rates, however, mask the high valuations (based on (rental) income-related criteria). The probability of higher interest rates is increasing in 2017.

Jan Kleipool Investment Analyst

that the sector is well positioned to make the most of a sustained economic recovery in the US and Europe. In our opinion, however, the risks are increasing in the form of geopolitical tensions, the effect of interest rate hikes on the economy late in the cycle and the scaling back of monetary expansionary policies. In order to take over the baton of the monetary policy of recent years, a concrete fiscal expansionary policy under Trump would be a welcome development for the sector and the economy as a whole

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The low interest rates mask high valuations.The real estate sector will be faced with a new cycle of interest rate hikes by central banks in the coming years. Valuations based on income-related criteria in the US and Europe are on the high side. The low bond yields still mean that the return on listed real estate is relatively attractive. This partly justifies the current valuations, but in our opinion provides insufficient certainty because this difference can be rapidly reduced when interest rates rise.The sharp decline in interest rates and the economic recovery in the United States and Europe have led in recent years to healthy returns. With higher interest rates anticipated, we expect that real estate will experience greater headwind. However, if the pace of interest rate hikes remains low and is combined with continued economic recovery in the US and Europe, we believe that the real estate sector can show a stable to positive price trend.

Operational trends weakening, recovery rallies possibleOperational trends (operating results) are still positive in most US real estate equities, but are clearly weakening. In Europe too, the operational trends of many real estate equities have not been very good in recent quarters. Valuations based on net asset value are now less strained, however. Combined with continued economic growth and limited increases in market rates in the US and Europe for the time being, we believe there is room for interim recovery rallies.

The boom in listed real estate is now probably behind usThe outlook for listed real estate is less rosy than in recent years. With the prospect of higher interest rates, excessively high valuations based on income standards in Europe and the US and weakening operational trends, the boom in global listed real estate is now expected to be behind us. We also do not expect any exuberant price developments for listed real estate in the second half of 2017.

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What is the industrials sector?The industrials 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.

For a number of years, commodity prices have already been very low compared to the previous years. Consequently, manufacturers of mining equipment, for example, are still contending with the postponement of investments by mining firms. Nevertheless, signs of a cautious recovery are visible here and there. For example in the quarterly figures from Caterpillar, which were far better than analysts’ consensus expectations. At the same time, airlines benefit from low oil prices, so that fuel costs have decreased.Nevertheless, the aviation sub-sector is not doing so well: airlines are suffering from overcapacity, high fixed costs, and the trade unions do not always cooperate. But within this sector there are also possibilities. In the US, 80% of the market is owned by only four major airlines. The financial position and free cash flow of these companies is therefore also

generally strong.The railway companies in the US also suffered from declining demand for transport capacity in 2015 and 2016.

One of the reasons for this is the low gas price, which means that US utility companies need less coal to generate electricity. The railway companies in the US have responded to this with cost savings and pricing power. While there was still declining demand in 2015 and 2016, this has increased again in 2017. Many developments therefore influence one another, with economic growth being the most important factor. And although the prices of some commodities have shown a strong increase, commodity prices are still low when looked at over a longer period.

Industrials

Economic growth is no guarantee for more profit from industrial corporations. 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.

Investing in ‘smart’ production is essential in order to keep up

David Wolters Investment Analyst

Low commodity prices have an effect throughout the sector

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Innovation through the smart application of technologyInnovation can provide a competitive advantage. It therefore remains important for industrial enterprises to innovate. Technological developments take place at a rapid pace. Consider, for example, the advance of the 3D printer, the ongoing computerisation and robotics in factories. The ‘internet of things’ is another example. Aircraft fuel consumption can be reduced by combining a variety of data, such as the weather, the fuel consumption of the engine, navigation data. 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 robotsIn 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 or enable their suppliers to work with them.

Hardware with embedded softwareWithin the industrial goods sector, we think 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 group that invests heavily in software is General Electric (GE, see also the article on the energy sector).

Which equities do we find attractive?For 2017 we have several preferences within the industrial goods sector. We still regard conglomerates attractive: large, composite groups. In this respect, we particularly look for companies that improve themselves by increasing their profit margins, reducing costs or disposing of divisions that are not part of the strategic activities. These concerns are better able to absorb the low commodity prices, because 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, which operates in various end markets with various divisions. Thus GE for example produces equipment for the oil and gas industry as well as medical devices. We believe other attractive equities to be FedEx (courier services sub-sector) and Deere (forestry and agricultural machinery sub-sector).

Commodity prices may also rise againCommodity prices may still produce positive impulses for the sector. A widely used commodity index, the CRB Commodity Index, is now round about the 2003 level. Once there is a change 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 the industrial goods sector.

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Oil price is crucial for the entire sectorThe level of oil and gas prices strongly influences the profits of companies in the energy sector. The higher the oil price, the higher the profit. It is therefore understandable that the profits in the energy sector are much lower than three years ago. Oil prices fell sharply in the meantime: in June 2014 the oil price was still above one hundred dollars per barrel. At the time of writing, the price of a barrel of crude oil (both WTI and Brent quality) is fluctuating between $49 and $56. The agreements on production cuts made by members of OPEC, the organisation of oil-exporting countries, are being properly complied with. The tactic is to reduce oil stocks worldwide. This approach appears to be working.

Corporate earnings in the energy sector uncertain due to the oil priceThe energy sector includes major oil companies like Shell, ExxonMobil and BP, which have both an upstream division (for pumping up oil and gas) and a downstream division (refineries, petrol stations, oil derivatives). 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 (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 dataWe think it is increasingly important for companies in the oil service sector to combine software and hardware since the work performed by oil service providers in the oil fields generates enormous amounts of data. This data can be utilised much

Energy

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.

Big data on oilfields just as interesting as the oil itself

David Wolters Investment Analyst

All oil wells in the world connected to the industrial ‘internet of things’

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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 concerning the risks for both large oil service companies and, for instance, for offshore drilling companies. This trend will be even stronger in 2017.

Preference for 2017: major oil companies, secure selection of oil servicesWithin the energy sector, we have a preference in 2017 for the ‘super majors’ (the very largest groups) and also look selectively at oil service companies. Within the group of super majors, we prefer companies with a strong free cash flow, a healthy

balance sheet and a large downstream division. Although the results of the downstream divisions are under pressure, the downstream division within such groups 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 merger of General Electric’s oil and gas division with services company Baker Hughes also offers opportunities.

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Healthcare

The healthcare sector is struggling. There are currently no signs pointing to above-average earnings growth. But concerns that successfully introduce medicines onto the market can still earn billions in profits.

Research and development offer considerable profit potential

No strong recovery in investment returns expectedIn 2016, the healthcare sector was – in contrast to previous years – the worst performing equity sector on the market. The pharmaceutical companies sub-sector, accounting for more than half of the sector’s market capitalisation, lagged even further behind. Prices were actually under pressure throughout the year. This was partly due to political statements about pharmaceutical pricing policies, but certainly also because of a lack of new blockbusters, so that average prices are falling and margins are under pressure. The expected limited profit growth in the coming years does not provide enough room for a strong recovery in prices. The price development of the various pharmaceutical companies differs significantly, however. This is mainly due to differences in the product pipeline. For pharmaceutical companies, the product pipeline is vital as the patents on medicines are only temporarily valid. Therefore, a flow of successful new medicines are necessary for profit growth. On

average, it takes about eight years of research and product development before a new medicine can be sold. Successful new medicines can still yield billions of profits.

Confidence in biotechnology has not yet returnedDuring the past three years, the equities of companies in the biotechnology sub-sector have on average recorded nearly twice as much return as the MSCI All Country World Index (source: Bloomberg, 2 May 2017). This return was, however, entirely realised in 2014 and 2015. The equity prices of biotech companies have now already been under pressure for more than one and a half years 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 equities consequently have a very low valuation. The price-to-earnings ratio reflects the valuation of a share on the stock market and can

Eric de GraafInvestment Analyst

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assist investors in their assessment of shares. Other valuation methods include, for example, the price to cash flow ratio and the price to book value ratio. The average valuation differs by business sector. The valuations also vary per phase of the economic cycle as the (average) earnings per share fall or rise as the economy shrinks or grows.

Medical devices: limited growth and consolidation as a solutionThe average valuation of shares of manufacturers and suppliers of medical equipment is at its highest level in almost a decade at the beginning of 2017. 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 slightly. We expect further consolidation in the coming years, and these companies can also benefit from the announced tax cuts in the United States. 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: mergers forbidden, tax cuts positiveThe 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. However, a reduction of the US tax rate may very positively impact this group, since the profit is almost entirely realised in the United States. Several major acquisitions of health insurers were forbidden earlier this year by the regulatory authority. However, acquisitions of smaller players are still a proven means of increasing scale and thus reducing the costs per prescription or administered medication.

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Each sub-sector has winners and losersEquities from the information technology sector have to date been performing well in 2017, as in previous years. However, this is not evenly distributed across all sub-sectors. Semiconductor producers, for example, performed significantly better than all other sub-sectors, while manufacturers of communications equipment did significantly worse. There are also large differences in price performance within the sub-sectors, with the market leaders often doing better than average. We expect that this situation will also continue in the future as the winners become increasingly dominant and are able to hold onto more and more customers.

Growth in the automotive and industrials sub-sectorsMany initiatives were presented in 2016 that could in the long term constitute a significant part of the turnovers in the hardware segment and thus possibly produce growth. Examples include self-driving electric cars, all kinds of robotic applications and virtual reality. New growth markets are also badly needed, as the more traditional PC and smartphone markets are barely showing any growth. We expect

limited growth to also be the norm in the coming years. Consolidation is consequently taking place throughout the chain.

Cloud software and advertisement sales also growth engines in 2017Software 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. In addition, the shift in advertising budgets towards online advertisements is continuing with full force. A company like Facebook, for example, can greatly benefit from this.

Information technology

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.

Market leaders set the standard and perform better than average

Eric de Graaf Investment Analyst

Large companies are growing even faster

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IT service providers: recovery of growth, but also fundamental changesAfter years of decline, the IT services sub-sector showed slight profit growth again in 2016. The larger companies have prepared themselves for this recovery by means of selective acquisitions and cost optimisation. Due to the ongoing economic recovery in many parts of the world, in 2017 and 2018 we also anticipate revenue growth and improved profitability

of companies in this sub-sector. In the long term, however, we see relatively limited growth. As a result of the structural transfer of activities to external cloud services, there is ultimately less demand for IT specialists, who are often hired by external IT service providers. We therefore do not expect profit margins, and thus stock market valuations, to return to historically high levels again.

Telecommunications services

Price competition puts the profits of established players under pressure. Meanwhile, investments are required to facilitate growing data usage.

Mixed signals from the telecom sector

Convergence and saturation result in price warThe differences between the networks of mobile providers are decreasing more and more, as is the willingness of consumers to pay a lot for mobile data. In various countries, consumers can now use ‘unlimited’ data for a fixed price. It is therefore harder for providers to differentiate themselves from the competition. New entrants from outside the market, such as Amazon in Germany and media company Comcast in the United States (US), regard mobile data as an addition to their existing services. This also results in price pressure for the established market parties. In Europe there are still considerable price differences for data usage between countries. The expectation is that, where these are above average,

they will fall towards the European average in the short term. The options open to telecom providers to counter this vary from region to region and are influenced by governments and supervisory authorities.

Content and data convergeBy bundling telephony, internet and TV services, telecom providers hope that their customers will be less inclined to switch supplier. Of course, it also helps if they are able to offer popular content (such as live sports matches or TV programmes). However, in order to broadcast the most popular programmes, they must pay royalties to content managers. The prices for this content have increased significantly

Jenny Overman Investment Analyst

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in recent years. For example, in the US, AT&T aims to solve this by taking over Time Warner, the cable TV company and television studio. In this way, AT&T not only acquires the programmes, but also all cable and pay-TV customers, as well as the advertising revenue. This vertical integration can be a means for telecom providers to strengthen their position, although such a large purchase does require a generous cash position and is only an option for the largest providers. Conversely, a smaller telecom provider with a good network could be a prey for a media company in order to build its own TV service with direct access to the viewers.

Content and fast internet mutually stimulate consumptionBy offering packages with different combinations of telephony, internet and content (such as series, sports reports and games), providers try to better meet the needs of the customer. Moreover, the availability of attractive content encourages

customers to consume 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.

Politicians and regulators: influence on the sectorUnder the Trump government, US market authorities (supervisory bodies) have become more flexible. This increases the likelihood of mergers and acquisitions on the US telecom market in the coming year. In the field of investment, network neutrality and the use of personal data, the attitude of the regulatory bodies now also seems to be more in favour of telecom companies. European telecom companies are subject to stricter supervision where mergers and investments are concerned. They are thus less able to shape their market than their American counterparts. New regulations, such as the elimination of foreign roaming charges and rules for registering ‘free’ phones with a subscription as consumer credit, put

earnings under pressure. On the other hand, the EU’s ambitious plans for rolling out 5G require a lot of new investment. Cost control will be an important factor for European telecom companies as long as mergers do not receive any support from the regulators.

Due to the growing data usage by consumers and new applications like the internet of things, the existing 4G network will not be fast enough in a number of years. Telecom providers are therefore already preparing for the new generation of network systems: 5G. This requires a lot more hardware, spectrum and optical fibre than is installed at present. Suppliers to the telecom industry can benefit from the increasing demand for their products. Because 5G can use the existing 4G and fibre-optic networks as a basis, telecom providers with their own high-quality network have an advantage. 5G applications encompass much more than just the telecom sector. By collaborating with businesses or organisations from the healthcare, transport or industry sectors, for example, telecom providers can also open up 5G for other target groups. This strengthens the position of telecom providers with their own high-quality network and 5G spectra. The actual deployment of 5G is still a few years away, however. Until then, these telecom companies will have to defend their market share in a highly competitive market.

Telecom companies seek collaboration in order to continue to grow

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Commodities

The rise in commodity prices, especially oil, depends on the pace of economic growth. If the oil price rises due to stronger than expected growth, the market sentiment in respect of commodities will also improve.

Leading role for oil, outlook remains neutral

The opinions are dividedThe sharp decline in commodity prices came to a halt in 2016: after four negative years, this asset class finally recorded a positive annual return, as we can see from the composite index. In 2017, commodities first took a step back. At the moment, the opinions, thus also market forces, are very divided. Investors who believe that stronger economic growth is imminent also believe that the recovery of commodity prices will continue since economic growth goes hand in hand with raw material

consumption. Stronger growth will therefore also help to reduce the accumulated sky-high stocks. We believe that it is still too early to speak of a definite turning point. After all, with higher prices and stronger demand, more raw materials are also produced, which again causes price pressure. For the rest of the year, much depends on the development of the oil price. Without more expensive oil, higher commodity prices are not very likely.

Friso RengersInvestment Manager

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Commodities index (in euro’s)

Source: Thomson Reuters Datastream, 26 mei 2017

Leading role for oilOPEC, the organisation of oil-producing countries, would like to see oil prices rise. Under the leadership of Saudi Arabia, oil producers, together with some non-OPEC countries including Russia, are aiming for an extension of the output cut agreement by the end of 2016. The question is how successful this agreement will be since US shale oil production has recently increased. And that puts pressure on prices.

The refining industry has also built up large stocks. Thus, not only the success of US shale production but also the increase or decrease in fuel stocks, plays a role. The oil price rise that commenced in March 2016 is therefore increasingly levelling off and the oil price (WTI quality) does not exceed $55 per barrel. This can clearly be seen in the chart below.

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Oil price (WTI, in dollars)

Bron: Thomson Reuters Datastream, 26 May 2017

What to expect in 2017?If the OPEC agreement to cut output coincides with accelerated growth in demand – as a result of more economic growth – oil prices will rise further. Oil is so important for the prices of all commodities that, in combination with higher economic growth, the entire class can be elevated to a higher price level. However,

with rising demand and higher prices, more can also be produced with current production capacity. Commodities offer, in addition to equities and bonds, diversification in an investment portfolio. We are maintaining a neutral commodities outlook.

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DisclaimerThis investment recommendation was prepared by the ING Investment Office, Amsterdam and issued by ING Bank N.V. on 1 June 2017 at 12:30 a.m. This investment recommendation does not constitute individual investment advice, but only a general recommendation on which investors can also base their investment decisions and does not constitute an invitation to enter into any contract or commitment whatsoever. No rights can be derived from this investment recommendation. ING Bank N.V., nor any other legal entity or unit belonging to the ING Groep N.V., accepts liability for any damage to any extent whatsoever, arising from the use of the above investment recommendation or the information contained therein. Developments that have occurred after the preparation of this investment recommendation may affect the accuracy of the facts presented and opinions stated in this investment recommendation.On https://www.ing.com/About-us/Compliance/Information-Barriers-Conflicts-of-Interest.htm you can see which measures ING takes to prevent and avoid conflicts of interest with respect to recommendations. Investing entails risks. The value of your investment may fluctuate. You could lose all or part of your initial investment. Past performance is no guarantee of future results. ING Bank N.V. has its registered office in Amsterdam, Commercial Register no. 33031431, and is supervised by the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten; AFM). ING Bank N.V. is part of ING Groep N.V.