annual investment outlook growth connectors in …...growth connectors in 2017 investment outlook...

Annual Investment OutlookAnnual Investment Outlook

Growth connectors in 2017

2

INTRODUCTION 3

GROWTH CONNECTORS IN 2017 4

Macro THE CONSEQUENCES OF POSITIVE DISRUPTION 8

EquitiesGROWTH TO SUPPORT EQUITIES 10

Equity thematicPROFITING FROM THE CONNECTED WORLD 12

Private equity ADDING VALUE BY OTHER MEANS 14

BondsAN UNFRIENDLY WORLD FOR BONDS 16

CommoditiesDIVERSE 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 ABN AMRO publication. Risk profiles and the availability

of investment products may differ by country. Your local advisor will be able to

provide more information.

Contents

3

This Investment Outlook addresses the positioning of private clients for 2017 – a time of momentous change that is accelerating the transi-tion 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.

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.

Introduction

Didier Duret

Chief Investment Officer,ABN AMRO Private Banking

December 2016

4

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.

5

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 equi-

ties 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.

Growth connectors in 2017Investment Outlook December 2016

6

XX Inflation could be underestimated. Fiscal stimulus

in the US could lead to more assertive rate normalisation.

The perception that the Fed needs to be more aggressive

could prompt a sudden increase in US Treasury yields.

XX Political risk has shifted to Europe: Nationalistic

parties may take encouragement from the successes of

anti-establishment parties in the US and UK. This could

ignite fear of a new European crisis.

Opportunities and diversifiers in the portfolio

XX Equities are favoured in the portfolio: The earnings

recovery should gather momentum from the improve-

ment of economic conditions. Equities could also benefit

from a rotation out of bonds. We expect a reorientation

towards cyclical sectors. There is an opportunity to profit

from the connected world, where new products and

geographic expansion are driving earnings growth.

XX A balanced view toward developed and emerging markets. Within emerging markets, Asia is preferred,

given the stabilising political and economic forces of

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

Active strategies

Represents absolute deviation from the benchmark created by our active investment strategy. These decisions affect all the profiles. Profile 3 (balanced) is represented here.

Cash

Bonds

Equitiesconsumer staples,

utilities,telecom

Hedge funds

Real estate

Commodities

neutral

active deviation (%)

investment-grade, inflation-linked,

high-yield

oil,base metals

IT, health care

core government

10 20 30-10-20-30

Source: ABN AMRO Private Banking

7

Growth connectors in 2017Investment Outlook December 2016

8

The consequences of positive disruption

Global growth is picking up and could get a boost from the economic policies of the new adminis-tration in the US. Emerging markets, however, are vulnerable in the longer term to protectionist US trade policies.

The global economy appears to be gaining some momen-

tum. Preliminary evidence can be found in rising business

confidence indicators across a large number of countries

and rising industrial metals prices. This is the result of the

combination of four factors: higher commodity prices this

year (which have stabilised the energy sector and is positive

for emerging economies), successful efforts by the Chinese

to prop up economic growth, the turn in the inventory cycle

in the US and the strengthening of the information-technol-

ogy cycle worldwide. It is likely that these supportive factors

will continue to play out during the next couple of quarters.

By the time they fade, a boost to US economic activity from

President Donald Trump’s pro-growth policies may be taking

effect. Our preliminary estimate is that Trump’s growth

agenda will add 0.5% to US growth on an annual basis.

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-

tion policies.

It is not clear, of course, what exactly the new president

will be able to get through Congress, but it seems reason-

able to assume that the US economy will get a considerable

boost during the 2017/2018 period. A number of likely policy

initiatives will be disadvantageous to emerging economies,

though the effects will differ by country.

Fiscal stimulus needed in Europe

Business confidence has recently strengthened in Europe.

The region is in danger of losing some momentum, however,

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

Macro

8

9

Forecasts: Macro indicators (%)1

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: ABN AMRO Group Economics, Consensus Economics, EIU

are fading. The extent to which Europe can follow the US

in terms of growth over the next two years will depend on

whether or not Europe’s policymakers successfully focus

on reform. We are assuming that policymakers, facing the

threat of populist politicians, will ease up on austerity.

The jury is out for emerging economies

Emerging economies are benefitting from the stabilisation

of growth in China, improving commodity prices and the

improvement in cyclical momentum currently underway

globally. In the longer term, they will be confronted with

more aggressive trade policies in the US. It is hard to gauge

and quantify how strongly these economies will be affected.

A correction of their currencies may be required, which in

some cases, has already happened.

Manufacturing is gaining momentum

Source: Thomson Reuters Datastream

Monetary policies to slowly return to normal

Inflation is generally low, though edging up in the US, while

inflation expectations are moving higher. This is partly due

to continued modest growth, rising commodity prices,

changing expectations concerning central bank policies and

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

the next two years, but with recurring risk of divergence.

Risks for investors revolve around the pace of economic

growth. On the one hand, there is the risk that expectations

are exaggerated and the pace of growth disappoints. On the

other hand, if growth is too strong, there could be negative

consequences from inflation.

Han de Jong, Chief Economist

40

50

60

ChinaEurozoneUS

Jan 16Jan 15Jan 14Jan 13Jan 12Jan 11Jan 10

Group EconomicsInvestment Outlook December 2016

As measured by PMI indices. Above 50 signals improvement; below 50 signals deterioration.

Real GDP growth 2017 Inflation 2017

ABN

AMRO

Market

view

ABN

AMRO

Market

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

10

Growth to support equities

With a renewed impulse to economic growth, we advise increasing the cyclical exposure in equity portfolios, at the expense of interest-rate-sensi-tive defensive stocks.

In 2017, we see several positive fundamental drivers for

equities, such as improving macroeconomic conditions,

earnings growth momentum and attractive yields relative to

other asset classes. After becoming more positive regard-

ing equities in October, we became even more positive in

November, after the US elections.

Solid fundamentals supporting stocks

Improving economic indicators of production and consump-

tion point to reviving global demand and economic growth.

The pro-business agenda advocated by the Trump admin-

istration in the US will accelerate global growth and create

positive conditions for equities.

Company earnings are growing; the third-quarter earn-

ings season showed positive earnings growth momentum.

There were more companies reporting better-than-expected

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.

Equity returns are attractive compared with other asset classes. In addition to an average dividend yield of 3%,

we expect equity performance to be supported by increas-

ing earnings growth. This positive feature should continue

despite US interest rates gradually rising in the direction of

more normal rates. This leaves room for equities to perform

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.

Moving toward cyclicals and away from interest-rate dependent sectors

To benefit from the positive trends in equity markets, we

advise clients to shift their equity portfolios further toward

cyclical stocks and to opt for less interest-rate sensitive

positions. This includes moving away from defensive parts

of the market, such as telecoms. Instead, we recommend

investing more in the industrials sector. Industrial indicators

10

underweightneutraloverweight

-10% -5% 5% 10% 15% 20%

-0.5

-0.4

-0.3

-0.2

-0.1

0.1

0.2

low EPS growth 2015-2018 high EPS growth 2015-2018

hurt

by

risin

g ra

tes

bene

fits

from

ris

ing

rate

s

financials

industrials

utilities

consumer staples

health care

telecoms

information technology

materialsenergy

consumer discretionary

Source: MSCI, IBES, ABN AMRO Private Banking

Interest-rate sensitivity determines equity sector positioning

Equities

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 2002-2016 (vertical axis, from minus 1 to plus 1).

11

are improving, and we expect industrial capital expenditures

and sales to follow.

This shift toward cyclicals is in addition to our earlier move

to a more positive view regarding the financials sector. We

expect banks and insurance companies to benefit from

rising interest rates and growth momentum, which could

support operating margins. Medium-term earnings trends

are also constructive for health-care and information-tech-

nology stocks. We remain negative on the utilities sector. As

can be seen in the Graphic, the sensitivity to interest rates is

a leading factor in our sector positioning.

A balanced view toward regions following US elections

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

stronger US dollar and rising interest rates in the US should

benefit European stock performance. Taken together, we

recommend increasing exposure to equities in developed

markets in the US and Europe. Within our balanced view

toward emerging markets, we continue to prefer Asia.

Within Asia, we advise investing in countries that are less

sensitive to interest rates and less reliant on trade. We there-

fore prefer China for its domestic consumer demand and for

its potential for fiscal stimulus. We are less positive regard-

ing Hong Kong and Singapore, given their sensitivity to US

interest rates.

Annemijn Fokkelman

Global Head Equity Strategy & Portfolio Management

Investment Strategy & Portfolio ExpertiseInvestment Outlook December 2016

Region Position

Forward

P/E 2017

Global equities Overweight 15.1

(MSCI World All Countries)

Developed markets

-US (MSCI US) Neutral 16.7

-Europe (MSCI Europe) Neutral 14.0

-Japan (MSCI Japan) Neutral 14.0

Emerging markets

- Asia (MSCI Asia ex-Japan) Neutral 12.4

- Latin America (MSCI Latin America) Neutral 14.1

- Emerging markets EMEA Neutral 10.0

(MSCI Emerging Markets EMEA)

Forecasts: Equity indexes

Source: Bloomberg, MSCI. Data as of 28 November 2016

11

12

Staying connected using mobile apps is increas-ingly important for consumers and businesses. Social-media and e-commerce platforms domi-nate mobile applications and represent investment opportunities, as they expand their services and geographic reach.

The online world is increasingly mobile. Young people are

constantly connected to friends, online shopping is second

nature and so are playing mobile games and watching online

video and TV wherever and whenever you want. And it is not

only personal lives that have changed. Businesses increas-

ingly work in the “cloud” and use new ways to collaborate,

independent of location. Companies are also increasingly

using social media and e-commerce marketplaces to connect

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

growth has largely been at the expense of money spent on

search engines. (See Graphic on next page.)

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

was the original driver in the growth of these platforms, the

latest drivers are product and geographic expansion.

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

and make a dinner reservation. You can also split the dinner

bill online with your friends and on the way back home trans-

fer cash into a money-market fund offered by the Chinese

platform, Alibaba.

With these types of services, the big platforms are challeng-

ing many different types of companies, from travel agencies

to banks.

Profiting from the connected world

12

Equity thematic

Source: PwC

global data consumption on mobile devices

36%projected annual growth

in the coming years

13

Platforms are expanding outside their home market

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.

Above-average earnings growth

New initiatives, in terms of products and regional expansion,

are resulting in above-average earnings growth at these social

media, online video and e-commerce platforms, compared to

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

companies have been stable over the past two years and

recently even declined somewhat. With valuations at accept-

able levels, we believe the social media and e-commerce

segments of the IT sector can offer interesting investment

opportunities. 0

10

20

30

40

50

Other

ClassifiedsBanner

Mobile

Search

201620152014201320122011201020092008

%

Source: IAB, PwC Internet Ad Revenue Report, HY 2016

Mobile dominates online advertising*


*As a percentage of business online advertising budgets.

Of course, the future will not be one straight line upwards.

There will be bumps along the way, such as from regulations

on privacy or government controls. Moreover, there are also

many small innovative companies potentially gaining momen-

tum. 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.

Piet Schimmel

Senior Equity Thematic Expert

Source: ABN AMRO Private Banking, Bloomberg

35% earnings growthin 2017 & 2018

social media, online video and e-commerce platforms

14

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 domi-

nate 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 manag-

ers, who can add value to their investments, are in demand. Value can be added, for example, by trans-

forming 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 histori-

cally 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

Adding value by other meansPrivate equity

15

Investment Products & Wealth SolutionsInvestment Outlook December 2016

15

16

Bond yields are rising, responding to an expecta-tion 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.

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

higher. Because infrastructure spending is financed with

longer-dated US debt, the US yield curve steepened. It is

not known how much new financing will be needed to pay

for the stimulus measures.

A turning point has also been reached in the path toward

more normal rates. The new US administration and the

Federal Reserve are aligned with the same goals of higher

growth and reviving inflation. US Treasury yields are also

dragging the long-end of the European government bond

yield curve higher, owing to strong financial links.

Yields to rise upward in successive plateaus

We expect yields to reach higher levels in the form of

successive plateaus. We took measures to protect our bond

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 long-

term government bonds again will be when the nominal

yield reaches beyond our yield forecast or if an inflation peak

is perceived.

Policy divergence between the US and Europe

The Fed’s actions will lead to higher yields, not just in the

long-end of the yield curve, but in the short-end as well. The

European Central Bank (ECB) is in a different situation, since

the eurozone is not yet ready to embark on fiscal stimulus.

This creates a divergence in monetary policies and larger

interest rate differences between the government bonds

of the US and core Europe. The Graphic shows how yields

have diverged since Trump’s election in the US.

The ECB’s corporate bond purchase program will continue

to support European investment-grade corporate bonds.

We shifted the centre of gravity in the bond portfolio to this

segment in 2016, because of higher yields and perceived

safety.

16

An unfriendly world for bonds Bonds

17

Political risk in the eurozone

A series of elections in Europe in 2017 will provide plenty

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-

weight in 2016. If populist politicians receive strong backing

from voters, tensions will likely rise, leading to a larger divide

between northern and southern Europe in terms of politics

and bond markets. We will be ready to buy the government

bonds of peripheral countries if yield spreads approach

extreme levels.

US protectionism a risk to emerging markets

A second political risk is that the US undertakes harsh trade

protectionist measures, which, combined with a strong US

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-

growth agenda.

A silver lining for bond markets

There is a silver lining to the unfriendly environment for

bonds. The path back to more normal interest rates reduces

the overreliance on monetary policy. After the dust settles,

we expect that bonds will be able to play their role as the

safety-net for well-diversified portfolios again.

Mary Pieterse-Bloem

Global Head Fixed Income Strategy & Portfolio Management

25 Nov 2016 Q2 2017 Q4 2017

US

US Fed 0.50 1.00 1.50

3-month 0.93 1.20 1.60

2-year 1.14 1.20 1.50

10-year 2.36 2.60 2.90

Germany

ECB Refi 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

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Nov 11 Nov 12 Nov 13 Nov 14 Nov 15 Nov 16

Yiel

d in

%

Date

Germany US

US elections

Source: Bloomberg

Source: ABN AMRO Group Economics

Forecasts: Interest rates and bond yields (%)

Government bonds diverged after US elections


18

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 funda-

mental 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 dereg-

ulation 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

Diverse drivers in commodity marketsCommodities

23 November 2016 Spot price Avg 2017

Oil

Brent USD/bbl 49 55

WTI USD/bbl 48 55

Metals

Gold USD/oz 1188 1125

Silver USD/oz 16.3 15.4

Platinum USD/oz 931 863

Palladium USD/oz 733 722

Aluminium USD/t 1778 1800

Copper USD/t 5731 5685 300

500

700

900

1,100

1,300

1,500

1,700

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

2011 2012 2013 2014 2015 2016

US crude production (mb/d)

US rig count (rhs)

US crude production (mb/d) US rig count

Source: Thomson Reuters DatastreamSource: ABN AMRO Group Economics

Forecasts: Commodities Modest recovery in US crude oil production


19

20

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.

Financial markets appear to be positioning for a pickup in

US economic growth and inflation, following the election of

Donald J. Trump as US president and the Republican party’s

control of the Senate and the House of Representatives. The

more positive view for the US is based on Trump’s campaign

supporting sizable fiscal stimulus and pro-business policies.

At the same time, investors appear to be optimistic despite

the possibility of increased protectionism and geopolitical

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.

Trump victory has given the dollar wings

Since the US presidential elections, the US dollar has firmed

against most currencies. We have upgraded our forecasts

for the US dollar based on early views about the impact of

the Trump economic agenda. We now expect a substantial

pickup (to above-trend rates) in US growth and inflation. In

addition, we expect the Fed to hike rates more aggressively

than anticipated by financial markets, as we expect six rate

hikes over the next two years. Futures markets are currently

pricing in just two over the same period.

The combination of strong (above-trend) US growth and infla-

tion in 2017 and higher nominal and real yields (nominal yield

minus inflation) in the US than in other major markets support

the dollar (see Graphic). We now believe that the US-dollar

rally has the potential for another leg upwards. We expect the

euro versus the US dollar to break parity (where USD 1 equals

88

90

92

94

96

98

100

102

1.2

1.4

1.6

1.8

2.0

2.2

2.4

Jan 2016 Mar 2016 May 2016 Jul 2016 Sept 2016 Nov 2016

10-year US Treasury yield (lhs) US Dollar Index (rhs)

Index Yield (%)

Source: Bank of England, Bloomberg

US dollar is sensitive to higher Treasury yields

Responding to new US leadership

EUR 1) and for the exchange rate between the dollar and the

Japanese yen to move towards 115.

In general, we believe that emerging-markets currencies will

likely weaken because of capital outflows that could be trig-

gered by rising US yields. But, for most emerging-markets

currencies, we do not expect weakness beyond their 2015

low points. It is likely that the US-dollar rally will run out

of steam once financial markets have anticipated the strong

pickup in growth and additional monetary policy tightening.

In 2018, US dollar strength could wane, if yield differences

between the US and the rest of the world start to narrow

because the US economy slows or expectations resurface

that the Fed will pause its rate-hike cycle.

Georgette Boele - Coordinator FX &

Precious Metals Strategy

The US Dollar Index is a trade-weighted measure of the value of the US dollar relative to a basket of foreign currencies.

Currencies

21

FX pair 25 Nov. 2016 Q4 2017

EUR/USD 1.0605 0.95

USD/JPY 112.96 115

EUR/JPY 119.79 109

GBP/USD 1.2435 1.20

EUR/GBP 0.8528 0.79

EUR/CHF 1.0737 1.11

AUD/USD 0.7447 0.71

NZD/USD 0.7049 0.66

USD/CAD 1.3496 1.44

EUR/SEK 9.7751 9.50

EUR/NOK 9.0754 8.50

FX pair 25 Nov. 2016 Q4 2017

USD/CNH (offshore) 6.94 7.15

USD/INR 68.47 70.50

USD/SGD 1.43 1.50

USD/TWD 31.91 33.00

USD/IDR 13,525 13,900

USD/RUB 64.68 67.00

USD/TRY 3.46 3.50

USD/ZAR 14.15 15.25

EUR/PLN 4.42 4.30

EUR/CZK 27.04 26.50

EUR/HUF 309.35 300.00

USD/BRL 3.42 3.70

USD/MXN 20.64 19.00

Source: ABN AMRO Group Economics

Forecasts: Developed-markets currencies Forecasts: Emerging-markets currencies


Normalisation is good for hedge funds

22

Hedge funds had difficult periods in 2016, but as markets return to normal, their fortunes should improve.

Hedge funds faced challenges in 2016, but, in general, saw

a pickup over the summer. While the strategies we prefer

provided protection, overall returns were disappointing. We

believe that the challenges seen this year were specific to

2016 and that the growth prospects of hedge funds and

their valuable role in portfolio diversification will continue.

Equity strategies

Political disruptions and extreme monetary policies induced

large swings in risk appetite and created sharp positive and

negative market reversals. Long/short equity strategies

are based on identifying stocks that can be classified as

“winners” and “losers.” This strategy was confounded in

2016 by stocks behaving uniformly. Correlations were unsta-

ble and there was a low dispersion of returns. Nonetheless,

we expect that as economic policies return to normal, so

should equity markets. This will then recreate the environ-

ment that can favour diversified long/short equity hedge-

fund strategies.

Fixed-income strategies

Credit markets did not move in lockstep worldwide in

2016. This positive situation is expected to continue for an

extended period, especially given the new direction signaled

by the incoming US administration. The divergence seen

between central banks and fiscal policies around the world

is fertile ground for directional opportunities (both long and

short) across fixed-income asset classes. Issuer-specific

opportunities are expected to arise in the energy, real estate

and health care sectors. Fixed income long/short strategies

are generally tilted to the long side. This means that events

related to unexpected market stress could temporarily result

in negative returns.

Trading strategies

During the first six weeks of 2016 and also around the Brexit

vote in June, trading strategies offered solid diversification

benefits. The main challenge for trading strategies has been

the magnitude of several relief rallies during the year.

Trading strategies heavily rely on trends. Once a short posi-

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

Hedge funds

Investment Products & Wealth Solutions

Investment Outlook December 2016

23

Real estate: waiting for better days

The dividend yield and diversification benefits that investors expect from real estate should re-emerge in 2017.

Over the course of 2016, and following the US election,

listed real estate lost ground. The rotation toward cycli-

cals after the election and the prospect of higher US rates

weighed on the global performance of real estate invest-

ment trusts (REITs). Market sentiment was also dented by

rising US bond yields and the fear of less expansionary poli-

cies from the European Central Bank and Bank of Japan.

We believe that these fears will abate and investor focus

will return to market fundamentals. The road ahead may

be bumpy, however, given real estate’s sensitivity to inter-

est rates. We expect a gradual rate-hiking cycle in the US.

But, rate hikes do not inevitably mean underperformance

for the asset class. This is because demand fundamentals

are expected to improve in line with economic growth.

Furthermore, there is a natural inflation hedge to real estate,

as most rents can be contractually increased if inflation rises.

Fundamentals remain sound

Real estate fundamentals remain sound. There is an attrac-

tive dividend yield of about 4%, leverage is below histori-

cal 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.

Regional prospects vary

The outlook for real estate in the US remains relatively

healthy. Fundamentals are solid, with robust demand

and relatively limited supply. In Europe, we expect strong

demand for real estate on the back of low interest rates.

We see another strong year for German residential portfo-

lios and office space in France. Spain is also improving, and

we expect strong growth in rents for top locations. Retail

operations, in general, remain under pressure. We expect

lower rent growth in Italy after solid growth in 2016. Despite

a correction in the UK, we remain cautious.

Trends in Asian real estate will continue to be mixed. We

expect positive trends in Japan, but valuations in Australia

appear expensive. In China, the real estate market is

supported by accommodative policies, although we remain

cautious. In Singapore the negative trends appear to be

reaching bottom, while most trends in Hong Kong remain

negative.

Ralph Wessels - Equity Research & Advisory Expert

Real estate

Investment Strategy & Portfolio Expertise


24

EUR USD

22 May 2003 to 30 Nov. 2016* 2016 YTD (30 Nov. 2016) 22 May 2003 to 30 Nov. 2016* 2016 YTD (30 Nov. 2016)

Strategic Tactical Excess

Return


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

Performance (%) of the tactical asset allocation versus the strategic asset allocation

*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.

Performance

24

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 Profile 2

Strategic Tactical Deviation Strategic Tactical Deviation

Neutral Min. Max. Neutral Min. Max.

Money markets 5 0 60 44 39 5 0 70 24 19

Bonds 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

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 100 100 100 100




Money markets 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









Money markets 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






Asset allocation profiles

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.

2525


26

Members of the ABN AMRO Bank Global Investment CommitteeDidier Duret [email protected] Chief Investment Officer Private Banking

Gerben Jorritsma [email protected] Global Head Investment Strategy & Portfolio Expertise

Han de Jong [email protected] Chief Economist

Olivier Raingeard [email protected] Head Investments Private Clients Neuflize OBC

Bernhard Ebert [email protected] Head Discretionary Portfolio Management Bethmann Bank

Rico Fasel [email protected] Director Product Management Investment Advisory Netherlands

Group EconomicsGeorgette Boele [email protected] Coordinator FX & Precious Metals Strategy

Hans van Cleef [email protected] Senior Energy Economist

Roy Teo [email protected] Senior FX Strategist

Investment Strategy & Portfolio ExpertiseMary Pieterse-Bloem [email protected] Global Head Fixed Income Strategy & Portfolio Management

Roel Barnhoorn [email protected] Senior Fixed Income Thematic Expert

Willem Bouwman [email protected] Fixed Income Portfolio Manager

Chris Huys [email protected] Senior Fixed Income Portfolio Manager

Shanawaz Bhimji [email protected] Fixed Income Portfolio Manager

Jasvant Jadoenathmisier [email protected] Assistant Fixed Income Portfolio Manager

Carman Wong [email protected] Global Emerging Market Fixed Income Head

Grace M K Lim [email protected] Senior Fixed Income Analyst

Barbara Cheung [email protected] Fixed Income Analyst

Annemijn Fokkelman [email protected] Global Head Equity Strategy & Portfolio Management

Maurits Heldring [email protected] Equity Research & Advisory Expert

Jaap Rijnders [email protected] Equity Research & Advisory Expert

Ralph Wessels [email protected] Equity Research & Advisory Expert

Piet Schimmel [email protected] Senior Equity Thematic Expert

Paul van Doorn [email protected] Senior Portfolio Manager Equities

Chris Verzijl [email protected] Portfolio Manager Equities

Martien Schrama [email protected] Profile Manager

Chew Hwee [email protected] Head Asia Equity Strategy

Javy Wong [email protected] North Asia Equity Strategist

Investment Products & Wealth SolutionsWilbert Huizing [email protected] Hedge Funds Expert

Eric Zuidmeer [email protected] Private Equity Specialist

Quantitative Analysis and Risk ManagementHans Peters [email protected] Head Investment Risk

Paul Groenewoud [email protected] Quant Risk Specialist

Contributors

27

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The information may therefore not expressly be regarded as

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investment services can be found in the ABN AMRO Investment

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and up-to-date information, which has been obtained from

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(‘ABN AMRO’) is not a registered broker-dealer under the U.S.

Securities Exchange Act of 1934, as amended (the ‘1934 Act’)

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under applicable state laws in the United States. Accordingly,

absent specific exemption under the Acts, any brokerage and

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Neither this document, nor any copy thereof may be sent to or

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or to a US person.

Other jurisdictions: Without limiting the generality of the

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products or investment services described herein is not intended in

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an offer, sale and/or distribution. Persons into whose possession

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investment products and investment services described herein.

ABN AMRO cannot be held responsible for any damages or losses

that occur from transactions and/or services in defiance with the

restrictions aforementioned.

Sustainability IndicatorSustainability Indicator Disclaimer: ABN AMRO Bank

N.V. has taken all reasonable care to ensure the indicators are reli-

able, however, the information is unaudited and subject to amend-

ment. ABN AMRO Bank is not liable for any damage that constitute

from the (direct or indirect) use of the indicators. The indicators

alone do not constitute a recommendation in relation to a specific

company or an offer to buy or sell investments. It should be noted

that the indicators represent an opinion at a specific period of time

considering a number of different sustainability considerations. The

sustainability indicator is only an indication regarding the sustain-

ability of a company within its own sector.


ABN AMRO MEESPIERSON

AMSTERDAM

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[email protected]

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For all enquiries, please contact one of the branches above.

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www.abnamroprivatebanking.com


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Europe Middle East

Asia


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