Annual Investment Outlook
Growth connectors in 2017
Contents
INTRODUCTION 3 GROWTH CONNECTORS IN 2017 Macro THE CONSEQUENCES OF POSITIVE DISRUPTION
4 8
Equities GROWTH TO SUPPORT EQUITIES
10
Equity thematic PROFITING FROM THE CONNECTED WORLD
12
Private equity ADDING VALUE BY OTHER MEANS
14
Bonds AN UNFRIENDLY WORLD FOR BONDS
16
Commodities DIVERSE DRIVERS IN COMMODITY MARKETS
18
Currencies RESPONDING TO NEW US LEADERSHIP
20
Hedge funds NORMALISATION IS GOOD FOR HEDGE FUNDS
22
Real estate REAL ESTATE: WAITING FOR BETTER DAYS
23
PERFORMANCE 24 ASSET ALLOCATION PROFILES
25
CONTRIBUTORS 26 This is an international ABNÂ AMRO publication. Risk profiles and the availability of investment products may differ by country. Your local advisor will be able to provide more information.
2
Introduction
This Investment Outlook addresses the positioning of private clients for 2017 – a time of momentous change that is accelerating the transition toward improved economic prospects. The new Republican administration in the US is providing a fresh impulse to the US, as economic policy is reconnected with a simple, effective growth agenda. We believe it will have positive implications worldwide. With higher growth and inflation, the US Federal Reserve will likely take decisive steps to increase interest rates. While the old, post-World War II globalisation of trade may be stalling, it leaves room for new trade, based on global digitalisation. This type of globalisation is introducing a new economic order, with opportunities for individuals, entrepreneurs and investors. The growth potential being unleashed should benefit cyclical equities, but bond yields are at risk of rising. Equities are our most favoured asset to generate investment returns. They are well placed to benefit from a positive cyclical upswing as well from the structural changes ahead. The US dollar should also benefit. Of course, with rapid change comes risk. In the US, risk is now linked to the implementation of the new administration’s policies. In Europe, three of the most important EU nations are facing elections in 2017. This is delaying the delivery of fiscal stimulus and maintaining reliance on the European Central Bank for growth.
Didier Duret Chief Investment Officer, ABN AMRO Private Banking December 2016
At the same time, higher inflation is a challenge to preserving capital, as the low yields left over from almost a decade of monetary policy stimulation leave little margin for error. ABN AMRO Private Banking’s investment team, who are responsible for this Investment Outlook, provides more information on their recommendations in the pages that follow. Your Relationship Manager or local investment professionals stand ready to assist you to prepare for what is ahead in 2017.
3
Growth connectors in 2017
Powerful fundamental trends, such as improving economic conditions, upcoming major stimulus in the US and technological transformation, are the basis for investing in 2017.
4
Growth connectors in 2017 Investment Outlook December 2016
The US election results created a clear political configuration for action to stimulate the US economy. They also introduced higher risk to bond markets in the short term and increased the risk to world trade in the medium term. The market’s adjustments after the Brexit referendum and the election of US President Donald J. Trump are evidence of its resilience and ability to adapt. In the fourth quarter, we became more positive towards stocks and reaffirmed our conviction that equities can be the engine of portfolio returns. This is especially true against a background of moderate growth and in comparison with other asset classes. The investment environment is normalising, moving away from deflation fears and towards a more sustainable pace of inflation. Bonds are out of favour, as their yields are well below historical norms. There is also little margin for error in bond markets, given that central banks are focused on generating inflation. Commodities continue to act as insurance against both inflation and volatile markets. In the dynamic environment ahead, cash should be deployed when opportunities appear, such as when bond yields rise or when equity markets correct.
Fundamentals are more powerful than politics XX
A revival in global growth is expected, propelled by more assertive fiscal policies in the US (2.4% GDP expected for 2017) and China (6.5%). Regional momentum in emerging markets (4.4%) and the eurozone (1.4%) will also help to break the global pattern of mediocre growth, low productivity and slowing trade.
XX
Growth will be the first priority of the new US administration, not trade protectionism. Globalisation is now less physical, more digital and service-based. It will be driven by technology and social trends and can occur outside traditional trade channels. Globalisation will create clear winners and losers. Winners will be characterised by higher-than-average profitability and independence from macroeconomic constraints, policy dilemmas or politics.
XX
Moving towards inflation and away from deflation. Inflation is expected to reach 2.7% in the US and 1.2% in the eurozone in 2017. There is little chance of generalised wage inflation. A stable US dollar and slow depreciation of the Chinese yuan, reduce the risk of inflation being exported from the US and China.
Challenges of calibrating policies XX
Massive divergence in fiscal impulses: Europe suffers from a lack of coordination of fiscal stimulus, which could perpetuate the overreliance on monetary stimulus. In the US, political forces are aligned and fiscal policy is simpler to implement.
5
XX
Inflation could be underestimated. Fiscal stimulus in the US could lead to more assertive rate normalisation.
Active strategies
The perception that the Fed needs to be more aggressive
neutral
could prompt a sudden increase in US Treasury yields. XX
Political risk has shifted to Europe:
Cash
Nationalistic
parties may take encouragement from the successes of anti-establishment parties in the US and UK. This could
Real estate
ignite fear of a new European crisis.
Commodities
Opportunities and diversifiers in the portfolio XX
oil, base metals
Equities are favoured in the portfolio: The earnings consumer staples, utilities, telecom
recovery should gather momentum from the improvement of economic conditions. Equities could also benefit
Equities IT, health care
from a rotation out of bonds. We expect a reorientation towards cyclical sectors. There is an opportunity to profit
Hedge funds
from the connected world, where new products and geographic expansion are driving earnings growth. XX
Bonds
investment-grade, inflation-linked, high-yield
core government
A balanced view toward developed and emerging markets. Within emerging markets, Asia is preferred, given the stabilising political and economic forces of
-30
China. XX
Commodities can add diversification to portfolios. The correlation between commodities and equity markets has decreased.
XX
Take a selective approach to bond markets, with a focus on investment-grade credits, for the yield.
XX
A strong US dollar could benefit euro-based portfolios. Didier Duret - Chief Investment Officer
6
-20
-10
10
active deviation (%)
20
30
Represents absolute deviation from the benchmark created by our active investment strategy. These decisions affect all the profiles. Profile 3 (balanced) is represented here. Source: ABN AMRO Private Banking
Growth connectors in 2017 Investment Outlook December 2016
7
The consequences of positive disruption Macro Global growth is picking up and could get a boost from the economic policies of the new administration in the US. Emerging markets, however, are vulnerable in the longer term to protectionist US trade policies.
A pro-growth agenda in the US Donald Trump’s agenda includes a significant boost to the US economy through tax cuts and infrastructure spending, a pro-carbon energy policy, efforts to change existing trade agreements in favour of the US and much stricter immigra-
The global economy appears to be gaining some momen-
tion policies.
tum. Preliminary evidence can be found in rising business confidence indicators across a large number of countries
It is not clear, of course, what exactly the new president
and rising industrial metals prices. This is the result of the
will be able to get through Congress, but it seems reason-
combination of four factors: higher commodity prices this
able to assume that the US economy will get a considerable
year (which have stabilised the energy sector and is positive
boost during the 2017/2018 period. A number of likely policy
for emerging economies), successful efforts by the Chinese
initiatives will be disadvantageous to emerging economies,
to prop up economic growth, the turn in the inventory cycle
though the effects will differ by country.
in the US and the strengthening of the information-technology cycle worldwide. It is likely that these supportive factors will continue to play out during the next couple of quarters.
Fiscal stimulus needed in Europe
By the time they fade, a boost to US economic activity from President Donald Trump’s pro-growth policies may be taking
Business confidence has recently strengthened in Europe.
effect. Our preliminary estimate is that Trump’s growth
The region is in danger of losing some momentum, however,
agenda will add 0.5% to US growth on an annual basis.
as its economy was temporarily boosted by favourable weather conditions early in 2016 and improving purchasing power resulting from falling inflation – the effects of which
8
Group Economics Investment Outlook December 2016
are fading. The extent to which Europe can follow the US
Monetary policies to slowly return to normal
in terms of growth over the next two years will depend on whether or not Europe’s policymakers successfully focus
Inflation is generally low, though edging up in the US, while
on reform. We are assuming that policymakers, facing the
inflation expectations are moving higher. This is partly due
threat of populist politicians, will ease up on austerity.
to continued modest growth, rising commodity prices, changing expectations concerning central bank policies and
The jury is out for emerging economies
fears that the Trump administration’s protectionist measures could cause inflation. We expect that central bank policies will remain accommodative, with a gradual tightening over
Emerging economies are benefitting from the stabilisation
the next two years, but with recurring risk of divergence.
of growth in China, improving commodity prices and the improvement in cyclical momentum currently underway
Risks for investors revolve around the pace of economic
globally. In the longer term, they will be confronted with
growth. On the one hand, there is the risk that expectations
more aggressive trade policies in the US. It is hard to gauge
are exaggerated and the pace of growth disappoints. On the
and quantify how strongly these economies will be affected.
other hand, if growth is too strong, there could be negative
A correction of their currencies may be required, which in
consequences from inflation.
some cases, has already happened. Han de Jong, Chief Economist
Manufacturing is gaining momentum
Forecasts: Macro indicators (%)1
60
Real GDP growth 2017
50
US Eurozone China
Inflation 2017
ABN
Market
ABN
Market
AMRO
view
AMRO
view
US
2.4
2.2
2.7
2.3
Eurozone
1.4
1.3
1.2
1.3
UK
1.7
0.9
2.7
2.3
Japan
0.7
0.9
0.8
0.4
Other countries*
2.1
2.1
1.6
1.8
EM Asia
5.9
6.0
2.9
2.8
Latin America
1.3
1.7
7.4
5.9
Emerging Europe
1.9
2.1
5.1
4.9
World
3.4
3.4
3.3
2.8
40 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 As measured by PMI indices. Above 50 signals improvement; below 50 signals deterioration.
1 All forecasts are year averages. The regions’ weights are based on PPP exchange rates. *Other countries are Australia, Canada, Denmark, New Zealand, Norway, Sweden and Switzerland.
Source: Thomson Reuters Datastream
Source: ABN AMRO Group Economics, Consensus Economics, EIU
9
Growth to support equities Equities With a renewed impulse to economic growth, we advise increasing the cyclical exposure in equity portfolios, at the expense of interest-rate-sensitive defensive stocks.
results than those that disappointed. In 2017, we expect company earnings to accelerate to double-digit growth, breaking out from the lackluster earnings of 2016.
In 2017, we see several positive fundamental drivers for
Equity returns are attractive compared with other asset classes. In addition to an average dividend yield of 3%,
equities, such as improving macroeconomic conditions,
we expect equity performance to be supported by increas-
earnings growth momentum and attractive yields relative to
ing earnings growth. This positive feature should continue
other asset classes. After becoming more positive regard-
despite US interest rates gradually rising in the direction of
ing equities in October, we became even more positive in
more normal rates. This leaves room for equities to perform
November, after the US elections.
well, as we continue to expect investors to focus on growth fundamentals. Global equity valuations, at a 2017 forward price-earnings ratio of 15.1x, should not be an impediment.
Solid fundamentals supporting stocks
Moving toward cyclicals and away from interest-rate dependent sectors
Improving economic indicators of production and consumption point to reviving global demand and economic growth. The pro-business agenda advocated by the Trump administration in the US will accelerate global growth and create
To benefit from the positive trends in equity markets, we
positive conditions for equities.
advise clients to shift their equity portfolios further toward cyclical stocks and to opt for less interest-rate sensitive
Company earnings are growing; the third-quarter earn-
positions. This includes moving away from defensive parts
ings season showed positive earnings growth momentum.
of the market, such as telecoms. Instead, we recommend
There were more companies reporting better-than-expected
investing more in the industrials sector. Industrial indicators
financials industrials
low EPS growth 2015-2018 -10%
benefits from rising rates
Interest-rate sensitivity determines equity sector positioning 0.2 information technology 0.1 materials
energy consumer discretionary high EPS growth 2015-2018
-5%
5%
10%
15%
20%
-0.1 telecoms
consumer staples utilities
hurt by rising rates
health care
-0.2 -0.3 -0.4 -0.5
overweight neutral underweight
This graph is a representation of expected earnings growth 2015-2018f (horizontal axis, in percent per annum) versus the sector’s long-term correlation coefficient to interest rate changes 20022016 (vertical axis, from minus 1 to plus 1). Source: MSCI, IBES, ABN AMRO Private Banking
10
Investment Strategy & Portfolio Expertise Investment Outlook December 2016
are improving, and we expect industrial capital expenditures
stronger US dollar and rising interest rates in the US should
and sales to follow.
benefit European stock performance. Taken together, we recommend increasing exposure to equities in developed
This shift toward cyclicals is in addition to our earlier move
markets in the US and Europe. Within our balanced view
to a more positive view regarding the financials sector. We
toward emerging markets, we continue to prefer Asia.
expect banks and insurance companies to benefit from
Within Asia, we advise investing in countries that are less
rising interest rates and growth momentum, which could
sensitive to interest rates and less reliant on trade. We there-
support operating margins. Medium-term earnings trends
fore prefer China for its domestic consumer demand and for
are also constructive for health-care and information-tech-
its potential for fiscal stimulus. We are less positive regard-
nology stocks. We remain negative on the utilities sector. As
ing Hong Kong and Singapore, given their sensitivity to US
can be seen in the Graphic, the sensitivity to interest rates is
interest rates.
a leading factor in our sector positioning. Annemijn Fokkelman
A balanced view toward regions following US elections
Global Head Equity Strategy & Portfolio Management
The Trump administration is expected to provide an impetus to US economic growth, which we expect to benefit US company earnings. At the same time, the accompanying
Forecasts: Equity indexes Region
Position
Forward
Global equities
Overweight
15.1
-US (MSCI US)
Neutral
16.7
-Europe (MSCI Europe)
Neutral
14.0
-Japan (MSCI Japan)
Neutral
14.0
- Asia (MSCI Asia ex-Japan)
Neutral
12.4
- Latin America (MSCI Latin America)
Neutral
14.1
- Emerging markets EMEA
Neutral
10.0
P/E 2017 (MSCI World All Countries) Developed markets
Emerging markets
(MSCI Emerging Markets EMEA) Source: Bloomberg, MSCI. Data as of 28 November 2016
11
Profiting from the connected world Equity thematic Staying connected using mobile apps is increasingly important for consumers and businesses. Social-media and e-commerce platforms dominate mobile applications and represent investment opportunities, as they expand their services and geographic reach.
Platforms are adding products and services As social and e-commerce platforms expand, they are eating into the revenues of companies across a range of sectors. In addition to their original functions, platforms are increasingly offering subscription- and fee-based services and products. With a Google app, for example, it is possible to order a taxi
The online world is increasingly mobile. Young people are
and make a dinner reservation. You can also split the dinner
constantly connected to friends, online shopping is second
bill online with your friends and on the way back home trans-
nature and so are playing mobile games and watching online
fer cash into a money-market fund offered by the Chinese
video and TV wherever and whenever you want. And it is not
platform, Alibaba.
only personal lives that have changed. Businesses increasingly work in the “cloud� and use new ways to collaborate,
With these types of services, the big platforms are challeng-
independent of location. Companies are also increasingly
ing many different types of companies, from travel agencies
using social media and e-commerce marketplaces to connect
to banks.
and communicate with customers. The importance of mobile offerings is reflected in advertising revenues. Over the past five years, mobile advertising has grown from less than 10% to almost 50% of online business advertising budgets. This
36%
growth has largely been at the expense of money spent on search engines. (See Graphic on next page.)
projected annual growth in the coming years
Big social-media and e-commerce platforms are at the centre of this new mobile world, taking an increasing part of the earnings generated from online activities. If mass adoption
global data consumption on mobile devices
was the original driver in the growth of these platforms, the latest drivers are product and geographic expansion.
12
Source: PwC
Investment Strategy & Portfolio Expertise Investment Outlook December 2016
Of course, the future will not be one straight line upwards. There will be bumps along the way, such as from regulations
social media, online video and e-commerce platforms
35%
earnings growth in 2017 & 2018
on privacy or government controls. Moreover, there are also many small innovative companies potentially gaining momentum. Therefore a diversified investment solution, such as using a fund or ETF (exchange-traded fund) may be the best way to profit from the new connected world.
Source: ABN AMRO Private Banking, Bloomberg
Piet Schimmel
Platforms are expanding outside their home market
Senior Equity Thematic Expert
In addition to new services, platforms are also growing by expanding out of their home markets. Alibaba, for example, is actively approaching German retailers to open online shops for Chinese clients. The huge cash flows being generated by platforms are also being put to work to acquire innovative online companies. Alibaba, for example, recently entered the Southeast Asia market with the takeover of the e-commerce player Lazada. And, the South-Africa based internet company Naspers, is also one of the biggest buyers of internet and online entertainment companies. Through acquisitions, it has become the fifth largest company in emerging markets, based on market capitalisation.
Mobile dominates online advertising* % 50
Above-average earnings growth New initiatives, in terms of products and regional expansion,
40
are resulting in above-average earnings growth at these social media, online video and e-commerce platforms, compared to
30
the MSCI World Index. Based on our research, we expect the nine biggest platforms will see earnings increase by more than 35% annually in 2017 and 2018. Valuations for these
Mobile Search Other Banner Classifieds
20
companies have been stable over the past two years and recently even declined somewhat. With valuations at accept-
10
able levels, we believe the social media and e-commerce segments of the IT sector can offer interesting investment opportunities.
0
2008 2009 2010
2011
2012
2013
2014
2015
2016
*As a percentage of business online advertising budgets. Source: IAB, PwC Internet Ad Revenue Report, HY 2016
13
Adding value by other means Private equity Private equity offers equity risk exposure, but is not influenced by market sentiment. Returns can be higher than equity investments, but the risks are also greater. This asset class is suitable only for qualified investors who understand the technicalities of private equity markets. The amount invested in private equity, including both buyouts and venture capital, is expected to increase in 2016, but not significantly. A total of USD 800 billion has been raised for investing in private equity, but has not yet been deployed, according to the research firm Preqin. The US continues to dominate the private equity sector, with Europe lagging the US in terms of new investments by a ratio one to three. The dominance of US private equity is seen in the regional focus of private equity funds that are seeking new investors. Over 50% of capital raised so far in 2016 is focused on the US, while around 25% targets Europe and the remainder is focused on Asia and the rest of the world.
Large stockpile of cash Competition is keen among fund managers for good companies in which to invest. Managers that source transactions via their own network and sell them via intermediaries to strategic buyers or through an initial public offering have a better chance of achieving their target returns. Similarly, hands-on managers, who can add value to their investments, are in demand. Value can be added, for example, by transforming a business model, improving operational efficiency or by creating new growth opportunities. The ability of a private equity firm to add value to an investment company is the basis for the potential excess return of a private equity investment compared with a passively held portfolio of listed stocks.
Leverage remains reasonable Financial leverage embedded in private equity transactions has not increased markedly, despite historically low interest rates over the past few years. The equity portion in leveraged buyout transactions is about 40% in the US and 50% in Europe. As such, it seems that the managers of private equity funds are continuing to be prudent and have not been negatively influenced by the increase of available cash ready to be invested. Of course, it is possible that not all of this money will be invested, as further investments could dilute a fund manager’s carefully constructed performance track record. The decision of whether or not to be fully invested and the ability to source investments over a four- to five-year investment period are key drivers of private equity returns. In the current economic climate, we focus on investing with proven managers that have shown the capacity to source good companies, using their own network and expertise to turn them into even better managed companies. Eric Zuidmeer - Private Equity Specialist
14
Investment Products & Wealth Solutions Investment Outlook December 2016
15
An unfriendly world for bonds Bonds Bond yields are rising, responding to an expectation of higher rates in the US and in anticipation of inflation and US fiscal stimulus. The good news is that, eventually, bonds will regain their traditional safety-net function in investment portfolios.
portfolio from higher yields by reducing its duration and by building exposure in inflation-linked bonds. We expect more entry points in 2017. The moment to buy medium- to longterm government bonds again will be when the nominal yield reaches beyond our yield forecast or if an inflation peak is perceived.
The bond market saw an upward spiral of interest rates after the election victory of Donald J. Trump, in reaction to fear of higher inflation from his fiscal stimulus policy measures. The quick gain in inflation expectations pushed nominal yields
Policy divergence between the US and Europe
higher. Because infrastructure spending is financed with longer-dated US debt, the US yield curve steepened. It is
The Fed’s actions will lead to higher yields, not just in the
not known how much new financing will be needed to pay
long-end of the yield curve, but in the short-end as well. The
for the stimulus measures.
European Central Bank (ECB) is in a different situation, since the eurozone is not yet ready to embark on fiscal stimulus.
A turning point has also been reached in the path toward
This creates a divergence in monetary policies and larger
more normal rates. The new US administration and the
interest rate differences between the government bonds
Federal Reserve are aligned with the same goals of higher
of the US and core Europe. The Graphic shows how yields
growth and reviving inflation. US Treasury yields are also
have diverged since Trump’s election in the US.
dragging the long-end of the European government bond yield curve higher, owing to strong financial links.
The ECB’s corporate bond purchase program will continue to support European investment-grade corporate bonds.
Yields to rise upward in successive plateaus
We shifted the centre of gravity in the bond portfolio to this segment in 2016, because of higher yields and perceived safety.
We expect yields to reach higher levels in the form of successive plateaus. We took measures to protect our bond
16
Investment Strategy & Portfolio Expertise Investment Outlook December 2016
Political risk in the eurozone of opportunity for populist waves, similar to what drove the Brexit referendum and Trump outcome. We already trimmed our peripheral eurozone bond exposure to a strong under-
Government bonds diverged after US elections Yield in %
A series of elections in Europe in 2017 will provide plenty
weight in 2016. If populist politicians receive strong backing
3.5 3.0
Germany US
2.5
from voters, tensions will likely rise, leading to a larger divide between northern and southern Europe in terms of politics
2.0
and bond markets. We will be ready to buy the government
1.5
bonds of peripheral countries if yield spreads approach extreme levels.
US elections
1.0 0.5
US protectionism a risk to emerging markets
0.0 Date
-0.5
A second political risk is that the US undertakes harsh trade
Nov 11
protectionist measures, which, combined with a strong US
Source: Bloomberg
Nov 12
Nov 13
Nov 14
Nov 15
Nov 16
dollar and an accelerated course of higher interest rates, could hit emerging-markets economies hard. We sold our position in emerging-markets bonds in November and would only re-enter the market at much higher spreads. Global high-yield bonds, however, could benefit from Trump’s pro-
Forecasts: Interest rates and bond yields (%)
growth agenda. 25 Nov 2016
A silver lining for bond markets
Q2 2017
Q4 2017
US US Fed
0.50
1.00
1.50
3-month
0.93
1.20
1.60
There is a silver lining to the unfriendly environment for
2-year
1.14
1.20
1.50
bonds. The path back to more normal interest rates reduces
10-year
2.36
2.60
2.90
0.00
0.00
0.00
3-month Euribor
-0.31
-0.35
-0.35
2-year
-0.76
-0.70
-0.50
10-year
0.23
0.50
0.80
the overreliance on monetary policy. After the dust settles, we expect that bonds will be able to play their role as the
Germany
safety-net for well-diversified portfolios again.
ECB Refi
Mary Pieterse-Bloem Global Head Fixed Income Strategy & Portfolio Management
Source: ABN AMRO Group Economics
17
Diverse drivers in commodity markets Commodities The rising trend for commodities should continue, but selectively. We remain optimistic regarding base metals and oil prices, but the outlook for precious metals, especially gold, is less positive. Inventory stabilisation, upwardly adjusted growth forecasts for the US and a stabilised Chinese economy have improved the outlook for base metals. There are large differences, however, among the various segments. Investor sentiment in the copper market is constructive, supported by solid Chinese macroeconomic data and brighter prospects for US infrastructure spending. Moreover, copper supply has actually grown less than expected, and London Metal Exchange inventories have declined. The outlook for the zinc and nickel markets also remains bright. Abundant supply, however, could weigh on currently low aluminium prices. We expect to see demand for all these metals holding up well in 2017. In general, the positive fundamental economic trends underlying base metals remain important drivers for their long-term direction.
Oil less sensitive to production cuts Oil prices have risen off their extreme low levels, but could see downward pressure, as the effect of an agreement among OPEC members to reduce production is being undermined by political elements. A strengthening US dollar could add further pressure. In the US, the new administration supports deregulation that is expected to benefit the traditional energy segment more than other segments, such as renewable energy. It could also provide a boost for the further recovery of the US shale industry. Uncertainty surrounding other US-related topics, such as geopolitics, US crude demand and interest rate hikes, could also have a significant influence on oil prices. We remain positive regarding oil, and expect the oil market to head towards a situation of supply/demand equilibrium in the course of 2017. (See Graphic). Our forecast is for an average oil price of USD 55 per barrel in 2017.
Precious metals under pressure The outlook for precious metals deteriorated in 2016, as physical demand eased in India and China. Pressure on gold prices is expected to continue, given the prospect of higher US rates and a stronger US dollar. Another negative factor could be the liquidation of speculative positions. Despite the divergence seen in commodity markets, we believe the asset class can continue to play a diversifying role in portfolios. In an environment where the course of inflation remains uncertain, we suggest continuing to hold commodities in well diversified portfolios. Hans van Cleef - Senior Energy Economist
18
Group Economics Investment Outlook December 2016
Forecasts: Commodities 23 November 2016
Modest recovery in US crude oil production
Spot price
Avg 2017
Oil
US crude production (mb/d) 10.0 US crude production (mb/d) 9.5
Brent USD/bbl
49
55
WTI USD/bbl
48
55
1,500
9.0 1,300
8.5 8.0
Metals
1,100
7.5
Gold USD/oz
1188
1125
Silver USD/oz
16.3
15.4
Platinum USD/oz
931
863
6.5
900
7.0
Palladium USD/oz
733
722
6.0
Aluminium USD/t
1778
1800
5.5
Copper USD/t
5731
5685
5.0 2011
Source: ABN AMRO Group Economics
US rig count 1,700
700 500 US rig count (rhs) 300 2012
2013
2014
2015
2016
Source: Thomson Reuters Datastream
19
Responding to new US leadership Currencies Currency markets are repositioning based on expectations for higher growth and inflation in the US and in reaction to political risk in Europe. The US dollar is expected to strengthen, but outflows could weaken emerging-markets currencies.
US dollar is sensitive to higher Treasury yields Yield (%) 2.4
Index 102
10-year US Treasury yield (lhs) US Dollar Index (rhs)
100
2.2
Financial markets appear to be positioning for a pickup in US economic growth and inflation, following the election of
98
2.0
Donald J. Trump as US president and the Republican party’s control of the Senate and the House of Representatives. The
96 1.8 94
more positive view for the US is based on Trump’s campaign supporting sizable fiscal stimulus and pro-business policies.
1.6
92
At the same time, investors appear to be optimistic despite the possibility of increased protectionism and geopolitical
1.4
90
risk, perhaps believing that, ultimately, this election rhetoric on these topics will not translate into policy choices. Finally, currency markets have built in more European political risk, reflecting the view that the forces of populism may have strengthened in Europe.
1.2
88
Jan 2016 Mar 2016 May 2016 Jul 2016
Sept 2016 Nov 2016
The US Dollar Index is a trade-weighted measure of the value of the US dollar relative to a basket of foreign currencies. Source: Bank of England, Bloomberg
Trump victory has given the dollar wings
EUR 1) and for the exchange rate between the dollar and the Japanese yen to move towards 115.
Since the US presidential elections, the US dollar has firmed against most currencies. We have upgraded our forecasts
In general, we believe that emerging-markets currencies will
for the US dollar based on early views about the impact of
likely weaken because of capital outflows that could be trig-
the Trump economic agenda. We now expect a substantial
gered by rising US yields. But, for most emerging-markets
pickup (to above-trend rates) in US growth and inflation. In
currencies, we do not expect weakness beyond their 2015
addition, we expect the Fed to hike rates more aggressively
low points. It is likely that the US-dollar rally will run out
than anticipated by financial markets, as we expect six rate
of steam once financial markets have anticipated the strong
hikes over the next two years. Futures markets are currently
pickup in growth and additional monetary policy tightening.
pricing in just two over the same period.
In 2018, US dollar strength could wane, if yield differences between the US and the rest of the world start to narrow
The combination of strong (above-trend) US growth and infla-
because the US economy slows or expectations resurface
tion in 2017 and higher nominal and real yields (nominal yield
that the Fed will pause its rate-hike cycle.
minus inflation) in the US than in other major markets support the dollar (see Graphic). We now believe that the US-dollar
Georgette Boele - Coordinator FX &
rally has the potential for another leg upwards. We expect the
Precious Metals Strategy
euro versus the US dollar to break parity (where USD 1 equals
20
Group Economics Investment Outlook December 2016
Forecasts: Developed-markets currencies FX pair
25 Nov. 2016
Q4 2017
Forecasts: Emerging-markets currencies FX pair
25 Nov. 2016
Q4 2017
EUR/USD
1.0605
0.95
USD/CNH (offshore)
6.94
7.15
USD/JPY
112.96
115
USD/INR
68.47
70.50
EUR/JPY
119.79
109
USD/SGD
1.43
1.50
GBP/USD
1.2435
1.20
USD/TWD
31.91
33.00
EUR/GBP
0.8528
0.79
USD/IDR
13,525
13,900
EUR/CHF
1.0737
1.11
USD/RUB
64.68
67.00
AUD/USD
0.7447
0.71
USD/TRY
3.46
3.50
NZD/USD
0.7049
0.66
USD/ZAR
14.15
15.25
USD/CAD
1.3496
1.44
EUR/PLN
4.42
4.30
EUR/SEK
9.7751
9.50
EUR/CZK
27.04
26.50
EUR/NOK
9.0754
8.50
EUR/HUF
309.35
300.00
USD/BRL
3.42
3.70
USD/MXN
20.64
19.00
Source: ABN AMRO Group Economics
21
Normalisation is good for hedge funds
Investment Products & Wealth Solutions Investment Outlook December 2016
Hedge funds Hedge funds had difficult periods in 2016, but as markets return to normal, their fortunes should improve.
Fixed-income strategies Credit markets did not move in lockstep worldwide in 2016. This positive situation is expected to continue for an
Hedge funds faced challenges in 2016, but, in general, saw
extended period, especially given the new direction signaled
a pickup over the summer. While the strategies we prefer
by the incoming US administration. The divergence seen
provided protection, overall returns were disappointing. We
between central banks and fiscal policies around the world
believe that the challenges seen this year were specific to
is fertile ground for directional opportunities (both long and
2016 and that the growth prospects of hedge funds and
short) across fixed-income asset classes. Issuer-specific
their valuable role in portfolio diversification will continue.
opportunities are expected to arise in the energy, real estate and health care sectors. Fixed income long/short strategies
Equity strategies
are generally tilted to the long side. This means that events related to unexpected market stress could temporarily result in negative returns.
Political disruptions and extreme monetary policies induced large swings in risk appetite and created sharp positive and negative market reversals. Long/short equity strategies
Trading strategies
are based on identifying stocks that can be classified as “winners” and “losers.” This strategy was confounded in
During the first six weeks of 2016 and also around the Brexit
2016 by stocks behaving uniformly. Correlations were unsta-
vote in June, trading strategies offered solid diversification
ble and there was a low dispersion of returns. Nonetheless,
benefits. The main challenge for trading strategies has been
we expect that as economic policies return to normal, so
the magnitude of several relief rallies during the year.
should equity markets. This will then recreate the environment that can favour diversified long/short equity hedge-
Trading strategies heavily rely on trends. Once a short posi-
fund strategies.
tion is taken in an asset class, such as equities, bonds or commodities, it may take days or weeks before returning to a long position (and vice versa). These reversals continue to offer diversification benefits but can also erode returns. A normalisation of equity volatility and interest rate levels will likely benefit trading strategies in 2017, in combination with strong trends in commodity prices. Wilbert Huizing - Hedge Funds Expert
22
Real estate: waiting for better days
Investment Strategy & Portfolio Expertise Investment Outlook December 2016
Real estate The dividend yield and diversification benefits that investors expect from real estate should re-emerge in 2017.
Regional prospects vary The outlook for real estate in the US remains relatively healthy. Fundamentals are solid, with robust demand
Over the course of 2016, and following the US election,
and relatively limited supply. In Europe, we expect strong
listed real estate lost ground. The rotation toward cycli-
demand for real estate on the back of low interest rates.
cals after the election and the prospect of higher US rates
We see another strong year for German residential portfo-
weighed on the global performance of real estate invest-
lios and office space in France. Spain is also improving, and
ment trusts (REITs). Market sentiment was also dented by
we expect strong growth in rents for top locations. Retail
rising US bond yields and the fear of less expansionary poli-
operations, in general, remain under pressure. We expect
cies from the European Central Bank and Bank of Japan.
lower rent growth in Italy after solid growth in 2016. Despite a correction in the UK, we remain cautious.
We believe that these fears will abate and investor focus will return to market fundamentals. The road ahead may
Trends in Asian real estate will continue to be mixed. We
be bumpy, however, given real estate’s sensitivity to inter-
expect positive trends in Japan, but valuations in Australia
est rates. We expect a gradual rate-hiking cycle in the US.
appear expensive. In China, the real estate market is
But, rate hikes do not inevitably mean underperformance
supported by accommodative policies, although we remain
for the asset class. This is because demand fundamentals
cautious. In Singapore the negative trends appear to be
are expected to improve in line with economic growth.
reaching bottom, while most trends in Hong Kong remain
Furthermore, there is a natural inflation hedge to real estate,
negative.
as most rents can be contractually increased if inflation rises. Ralph Wessels - Equity Research & Advisory Expert
Fundamentals remain sound Real estate fundamentals remain sound. There is an attractive dividend yield of about 4%, leverage is below historical trend levels, valuations are fair and the supply in major markets is limited. Urbanisation, where the population of cities increases, is also a long-term driver.
23
Performance
Performance (%) of the tactical asset allocation versus the strategic asset allocation EUR 22 May 2003 to 30 Nov. 2016* Strategic Tactical
Excess
USD 2016 YTD (30 Nov. 2016)
Strategic Tactical
Return
22 May 2003 to 30 Nov. 2016*
2016 YTD (30 Nov. 2016)
Excess Strategic Tactical
Excess Strategic Tactical
Excess
Return
Return
Return
Profile 1
72.76
76.36
2.08
1.19
1.13
-0.06
59.37
74.91
9.75
1.15
1.60
0.45
Profile 2
83.35
93.32
5.44
1.95
1.99
0.04
70.16
86.51
9.61
2.05
2.61
0.55
Profile 3
107.96
133.29
12.18
2.39
2.57
0.17
97.91
122.85
12.60
2.72
3.14
0.41
Profile 4
122.76
148.71
11.65
2.95
3.18
0.22
113.65
135.56
10.25
3.57
3.43
-0.13
Profile 5
145.13
180.33
14.36
3.47
3.84
0.36
135.32
163.39
11.93
4.37
4.00
-0.35
Profile 6
157.44
190.49
12.84
3.83
4.12
0.28
148.06
173.29
10.17
4.93
4.39
-0.52
*Profiles 1 and 2 are linked to the “old” Conservative profile, profiles 3 and 4 to the “old” Balanced profile and profiles 5 and 6 to the “old” Growth profile.
24
Asset allocation profiles
Investment Outlook December 2016
ABN AMRO’s Global Investment Committee model portfolio risk profiles in percent, starting with the most conservative (Profile 1) and ending with that most exposed to market risks (Profile 6). Asset allocation
Profile 1 Strategic Neutral Min.
Money markets
Profile 2 Tactical
Deviation
Max.
Strategic Neutral
5
0
60
44
39
Min.
Tactical
Deviation
Max.
5
0
70
24
19
90
40
100
51
-39
70
30
85
39
-31
Equities
0
0
10
0
0
15
0
30
22
7
Alternative investments
5
0
10
5
0
10
0
20
15
5
Bonds
Funds of hedge funds
5
5
0
5
5
0
Real estate
0
0
0
3
6
3
Commodities
0
0
0
2
4
2
Total Exposure
100
100
Asset allocation
100
100
Profile 3 Strategic Neutral Min.
Profile 4 Tactical
Deviation
Max.
Strategic Neutral
Min.
Tactical
Deviation
Max.
5
0
70
15
10
5
0
70
7
10
Bonds
55
20
70
30
-25
35
10
55
18
-17
Equities
30
10
50
40
10
50
20
70
60
10
Alternative investments
10
0
20
15
5
10
0
30
15
5
Money markets
Funds of hedge funds
5
5
0
5
5
0
Real estate
3
6
3
3
6
3
Commodities
2
4
2
2
4
2
Total Exposure
100
100
Asset allocation
100
100
Profile 5 Strategic Neutral Min.
Profile 6 Tactical
Deviation
Max.
Strategic Neutral
Min.
Tactical
Deviation
Max.
5
0
70
2
-3
5
0
60
2
-3
Bonds
15
0
40
7
-8
0
0
25
0
0
Equities
70
30
90
76
6
85
40
100
86
1
Alternative investments
10
0
30
15
5
10
0
30
12
2
Money markets
Funds of hedge funds
5
5
0
5
5
0
Real estate
3
6
3
3
3
0
Commodities
2
4
2
2
4
2
Total Exposure
100
100
100
100
The tactical asset allocation reflects active strategies that account for medium- and short-term views and represents a deviation from the longer term strategic asset allocation.
25
Contributors Members of the ABN AMRO Bank Global Investment Committee Didier Duret
didier.duret@nl.abnamro.com
Chief Investment Officer Private Banking
Gerben Jorritsma
gerben.jorritsma@nl.abnamro.com
Global Head Investment Strategy & Portfolio Expertise
Han de Jong
han.de.jong@nl.abnamro.com
Chief Economist
Olivier Raingeard
olivier.raingeard@fr.abnamro.com
Head Investments Private Clients Neuflize OBC
Bernhard Ebert
bernhard.ebert@de.abnamro.com
Head Discretionary Portfolio Management Bethmann Bank
Rico Fasel
rico.fasel@nl.abnamro.com
Director Product Management Investment Advisory Netherlands
Georgette Boele
georgette.boele@nl.abnamro.com
Coordinator FX & Precious Metals Strategy
Hans van Cleef
hans.van.cleef@nl.abnamro.com
Senior Energy Economist
Roy Teo
roy.teo@sg.abnamro.com
Senior FX Strategist
Group Economics
Investment Strategy & Portfolio Expertise Mary Pieterse-Bloem
mary.pieterse-bloem@nl.abnamro.com
Global Head Fixed Income Strategy & Portfolio Management
Roel Barnhoorn
roel.barnhoorn@nl.abnamro.com
Senior Fixed Income Thematic Expert
Willem Bouwman
willem.bouwman@nl.abnamro.com
Fixed Income Portfolio Manager
Chris Huys
chris.huys@nl.abnamro.com
Senior Fixed Income Portfolio Manager
Shanawaz Bhimji
shanawaz.bhimji@nl.abnamro.com
Fixed Income Portfolio Manager
Jasvant Jadoenathmisier
jasvant.jadoenathmisier@nl.abnamro.com
Assistant Fixed Income Portfolio Manager
Carman Wong
carman.wong@hk.abnamro.com
Global Emerging Market Fixed Income Head
Grace M K Lim
grace.m.k.lim@sg.abnamro.com
Senior Fixed Income Analyst
Barbara Cheung
barbara.cheung@hk.abnamro.com
Fixed Income Analyst
Annemijn Fokkelman
annemijn.fokkelman@nl.abnamro.com
Global Head Equity Strategy & Portfolio Management
Maurits Heldring
maurits.heldring@nl.abnamro.com
Equity Research & Advisory Expert
Jaap Rijnders
jaap.rijnders@nl.abnamro.com
Equity Research & Advisory Expert
Ralph Wessels
ralph.wessels@nl.abnamro.com
Equity Research & Advisory Expert
Piet Schimmel
piet.schimmel@nl.abnamro.com
Senior Equity Thematic Expert
Paul van Doorn
paul.van.doorn@nl.abnamro.com
Senior Portfolio Manager Equities
Chris Verzijl
chris.verzijl@nl.abnamro.com
Portfolio Manager Equities
Martien Schrama
martien.schrama@nl.abnamro.com
Profile Manager
Chew Hwee
chew.hwee.lim@sg.abnamro.com
Head Asia Equity Strategy
Javy Wong
javy.wong@hk.abnamro.com
North Asia Equity Strategist
Investment Products & Wealth Solutions Wilbert Huizing
wilbert.huizing@nl.abnamro.com
Hedge Funds Expert
Eric Zuidmeer
eric.zuidmeer@nl.abnamro.com
Private Equity Specialist
Quantitative Analysis and Risk Management Hans Peters
hans.peters@nl.abnamro.com
Head Investment Risk
Paul Groenewoud
paul.groenewoud@nl.abnamro.com
Quant Risk Specialist
26
Disclaimers General: The information provided in this document has been
Investment Outlook December 2016
drafted by ABN AMRO Bank N.V. and is intended as general
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27
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