(Local currency, Net Total Return) JPM EMBI+ (HC) 0,6 % 6 ... · JPM GBI EM Divers. (LC) -1,3 % 3,0...

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7 June 2017 Market Outlook

Risky asset classes have yielded well in the early part of the year and May was no ex-ception. Equity and corporate bond prices rose following the positive mood resulting from a successful Q1 earnings season. Economic indicators are nicely in the black in Europe, but the US and China are experi-encing a slight decline in companies’ confi-dence indices. Following the soft GDP growth figures (+1.2%) in the first quarter in the US, households’ and companies’ confi-dence figures are now under close scrutiny. In Europe, economic figures continue to be strong in relation to expectations and also the levels themselves are in better shape – this year’s GDP growth forecast for the euro zone is +1.7%. Compared to a year earlier, compa-nies’ earnings improvements in the first quarter were significant, which has also been factored into stock prices. We are maintaining our neutral recommendation and allocation weights for the equity mar-kets in our portfolios heading into June. We will maintain our moderate overweight rec-ommendation for European stocks and the share of fixed income investments will re-main neutral. We are not making any signifi-cant changes at this time.

Allocation -Fixed income: We will maintain fixed in-come at neutral weight. - Equities: We will maintain equities at neu-tral weight. Alternative investments: We will maintain alternative investments at moderate over-weight. The interest rate level remained more or less unchanged in May in both the US and

Europe. The ECB is, for now, unwilling to signal a more specific timetable for the winding down of its super-stimulating measures – we expect this to take place in the latter half of the year, however. The first interest rate hikes by the ECB have been forecast to take place at the end of 2018. According to our insight, the next US key interest rate hike will take place already in June. Strong employment figures are fuelling wage-push inflation (approx. +3% year-on-year growth at the moment), which gives the Fed no reason to maintain its current stimulus level. Reducing the Fed’s balance sheet is the next major issue to be communicated to the markets. The Fed would not be buying new bonds to replace the maturing bonds in its balance sheet and thus monetary policy would tighten gradually through financial market chan-nels over the next few years as government and other bond interest rates rise. Corporate bond yield levels in China are currently on the rise with credit risk premiums being priced higher. China’s corporate bond yields have climbed higher, contrary to the rest of the world’s corporate bond markets, which have even gone somewhat into overdrive at the moment. A large number of new issues were made in the Nordic countries and Europe in May. The ECB’s support purchases will in-crease demand for bonds as will the negative-interest-rate cash in the pockets of real corpo-rate bond investors. Simultaneously, compa-nies wish to lock down their financing at ex-tremely low interest rate levels for years ahead. The equity markets continued this year’s upward trend practically throughout the main markets. The rise in European equities in Western stock markets continued more

strongly than in the US thanks to a rise of +9.8% in the Stoxx 600 index from the start of the year. Similarly, in the US, the S&P 500 yielded +8.7% but if euro investors have not hedged their dollars, the return has remained at +1.1% due to the weakening of the dollar this year. Money flows on the equity markets are still net in favour of Europe, actually strength-ening in the wake of the French presidential election. There has been strong development in emerging market stocks in the early part of the year (MSCI EM +12.9%) but in May, on the emerging markets, the traditional political risk began to make its mark in Brazil (-4% in a month) as a result of the corruption allegations made against the president. In the big picture, however, concerns around the rate of China’s indebtness are the greatest threats on the emerging equity markets and, at the same time, the global equity markets. The lowering of Moody’s credit rating for China in May is just a small signal of a growing macro-level problem. So far, the indebtness of economic operators in China (altogether some 260% per GDP) has remained within the tolerance of investors but the question is for how long. As a whole, the low or negative interest rate level is continuing to steer assets into riskier markets, such as equities, on a global scale. We consider the outlook for the equity markets to be relatively good as long as there are no problems in earnings power on the in-dex level.

Source: Bloomberg. Past performance is no guarantee of future results.

Market returns 31.5.2017

Juhani Lehtonen, Head of Fixed Income & Market Strategy Investment Solutions

Mandatum Life Insurance Company Limited • Postal address: P.O. Box 627, FI-00101 Helsinki, Finland • Registered office and address: Bulevardi 56, 00120 Helsinki, Finland • Business ID 0641130-2 • www.mandatumlife.fi

Possible acceleration of economic growth in Europe

Fixed Income Return 1 mth Return 2017 Return 1 yr Alternative Investments Return 1 mth Return 2017 Return 1 yr

JPM Money Mkt 0,0 % -0,1 % -0,2 % S&P Commodity TR -1,5 % -8,5 % -7,2 %

JPM EMU Govt 0,6 % -0,3 % -0,4 % Oil (spot) -2,6 % -11,6 % -6,3 %

Barcleys Infl.Linked 0,2 % -1,3 % 0,4 % Gold (spot) 0,3 % 10,5 % 3,5 %

JPM Credit Index 0,3 % 0,3 % 1,1 % HFRX Global HF 0,0 % 1,3 % 3,7 %

JPM High Yield 0,9 % 3,3 % 8,7 %

JPM GBI EM Divers. (LC) -1,3 % 3,0 % 11,0 %

JPM EMBI+ (HC) 0,6 % 6,7 % 8,9 %

Equity Markets Return 1 mth Return 2017 Return 1 yr Foreign exchange 31.5.2017 28.4.2017

(Local currency, Net Total Return)

OMXH Cap Helsinki 2,3 % 12,2 % 27,1 % EURUSD 1,12 1,09

Euro Stoxx 50 1,0 % 10,0 % 19,2 % EURJPY 124,56 121,53

Stoxx 600 1,5 % 9,8 % 15,4 % USDJPY 110,78 111,49

S&P 500 1,4 % 8,7 % 17,5 % EURGBP 0,87 0,84

Dow Jones 0,7 % 7,5 % 21,2 % EURSEK 9,77 9,65

Nasdaq 2,7 % 15,7 % 26,8 % EURNOK 9,48 9,35

Nikkei (Japan) 2,4 % 3,6 % 16,2 % Interest rates

Hang Seng (China) 4,8 % 17,8 % 27,8 % Fed 1,00 1,00

India 4,1 % 17,3 % 18,2 % ECB 0,00 0,00

Russia (RTS) -5,3 % -8,4 % 21,9 % BoJ -0,10 -0,10

Brazil -4,1 % 4,1 % 29,4 % BoE 0,25 0,25

MSCI Europe 1,5 % 9,4 % 15,8 % Euribor 3m -0,33 -0,33

MSCI World All Country 1,6 % 8,7 % 17,7 % Euribor 12m -0,13 -0,12

MSCI Emerging Markets 2,5 % 13,0 % 21,7 % Germany10y 0,30 0,32

MSCI Latin America -2,0 % 6,2 % 20,6 % iTraxx Europe 5y (IG) 62,27 66,53

MSCI Eastern Europe -5,0 % -7,8 % 10,2 % iTraxx Crossover 5y (HY) 252,47 266,10

http://www.mandatumlife.fi/

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Current Situation

New corporate bond issues have been flooding the mar-kets during May. As of the beginning of the year, invest-ment grade bonds (credit rating BBB- or better) have been issued in the US to the amount of USD 590 billion and riskier high yield bonds to the amount of USD 120 billion. In Europe, the figure for new investment grade bond issues as of the beginning of the year was EUR 240 billion. Companies in both the Nordics and Finland have finally rushed onto the bond markets in order to lock down their financing costs during the extremely low underlying interest rate swaps and credit risk premiums. At the end of May, the Finnish companies Kemira, Neste, Stora Enso, Metso, Ahlström and Konecranes were looking for money on the bond markets. All of the issues have in common a huge final demand and significantly tighter credit risk pre-mium levels post-issue than the original subscription levels when the subscription books were opened. The same pattern has been replayed elsewhere in the Nordics and Europe. In investors’ cash accounts, a negative interest rate is generating negative figures and the pressure to do something more sensible with the mon-ey is now pushing hordes of investors like lemmings to-

wards, for instance, more risky corporate bond markets. The ECB’s super-stimulating monetary policy is clearly impeding price formation in credit risk premiums and we are taking a cautious approach to the recent flood of is-sues. We predict that we will see better levels for making corporate bond investments later in the year. We have allowed cash to accumulate somewhat in our fixed income investments so that we can be ready to invest when times improve. There is now reason to be selective on the bank loan markets (senior loans) and also in the bond markets. We will maintain, however, our moderate overweight rec-ommendation on the corporate bond markets as we head into June while the weight of the money markets is neutral.

Flooding in the corporate bond markets

On the European fixed income markets, low-risk gov-ernment bond interest rates moved moderately in May. The interest rate on Germany’s 10-year government bond fluctuated between +0.3% and +0.43% as the French presidential election swept the worst of the euro zone’s near-term challenges into the background. The direction of the ECB’s monetary policy will be a major factor in terms of the interest rate level this year and, for now, the central bank has only very moderately wanted to signal a change in the current situation. In June, the ECB will meet in Tallinn to discuss the timetable for winding down quantitative easing. It is likely that the central bank will not officially communicate anything very dramatic on the subject during the summer as yet. If economic growth continues along its current path, we are certain that the ECB will communicate in late 2017 its plans to reduce its QE programme during next year. This will cause interest rates to rise in Europe. The greatest uncertainty is linked to the interest rates on southern euro zone countries’ government bonds

with the single biggest buyer exiting these markets dur-ing next year. Inflation figures have fallen slightly in the euro zone with the annual rate of increase for prices in May at just +1.4% and core inflation, less energy and food, at +0.9%. The inflation rate is now closer to the truth than before as the underlying effect of raw material prices from late winter last year, when prices were at their lowest, is slowly waning. Wage-push inflation is still very moderate in Europe. As long as unemployment rates fall and the basic market sentiment remains at its current level, it is clear that wage demands will rise in the major Central European trade unions.

Past Situation

Interest rates bottom out in the euro zone


Fixed income

The Future

At the moment, the winding down of the central banks’ extreme stimulus policies is moving forward in the US, while in Europe it is at the starting block. In June, the ECB will be likely to communicate that the fast weakening of growth does not need to be focussed on as before with the wheels of the economy rolling along at a fairly good rate. Instead, according to our insight, no concrete news will be communicated about the winding down of stimulus measures in early summer. At the end of the year, the ECB will have to discuss the reduction of balance sheet pur-chases at the current economic momentum, which will cause interest rates to rise if other factors remain un-changed. Inflation pressure has been moderate in Europe to date but the reduction in the unemployment rate, espe-cially in Germany, is likely to raise pay pressures during the summer and early autumn. On the political side, September’s parliamentary election in Germany is not expected to result in any details that would destabilise the euro, but the Italian parliamen-tary election (to be held before May 2018) could cause some movement on the fixed income markets. At the same time as the ECB reduces its government bond purchases next year, the Italian political map could be just as chaotic as it is now. There is, of course, the risk that Italian bonds’

interest rate differential will widen significantly in relation to Germany’s. Political risks arise regularly in Europe, which has been obvious since the 2011–2012 euro crisis, but good companies will succeed on the markets regardless of the political setup at any given time. We forecast that the Fed will announce, during this year, its schedule for winding down its balance sheet and, in June, its next Fed Funds key interest rate hike.

Next big thing: re-duction of the Fed’s balance sheet


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Equities

Past Situation

European stocks have been this year’s relative winners. At the end of May, the broader Stoxx 600 index had risen from the beginning of this year by +9.8%. In the US, on the other hand, S&P 500 has yielded +8.7%, but if euro investors have had unhedged dollars, the S&P 500 index has only yielded +1.1% in total due to the weakening of the dollar this year. The currency markets also naturally impact the markets’ earnings expectation level and momentum in the long run but, currently, the earnings forecasts of European companies have not been revised down due to the strengthening of the euro this year. The weakening of the dollar has also assisted US stock markets in local curren-cies. In May, sector-wise, the best development was seen in US technology companies and community services. Weaker performers were oil service companies and tele-communications and biotechnology companies. In Europe, the best performer in relation to the general index was the community services sector. In May, European telecommu-nications companies clearly improved their weak long-term

performance against the main index. The uncertainty pre-ceding the French presidential election quickly dissipated and a larger net investment flow began into Europe also in May. We do not anticipate that June’s French parliamentary election will create any major political uncertainty with Pres-ident Macron’s centre liberals doing well in the polls. On the emerging markets, the corruption charges filed against the Brazilian president were a reminder of the traditional risk linked to emerging market countries (Bovespa -4.1% in May). In truth, these types of risks can also be linked to Western countries.

European stocks in fine fettle

After a successful first quarter earnings season, the mar-kets have lifted the main index earnings forecasts some-what higher still. In Europe on a broader scale, the earnings growth for the Stoxx 600 index is anticipated, at the mo-ment, to reach +20% in 2017 and +9% next year. In terms of sales growth, we are at +7.3% for the year in progress and close to +4% for next year. The recovery of Europe’s economies is going strong and this has also been factored in on the equity markets. Behind the first-quarter earnings improvement was also the brisk recovery of the raw materi-al sector compared to a year before, but what is noteworthy is that earnings growth forecasts have been raised across the sectors. The low interest rate level (and negativity on the short end) is weighing down the earnings momentum of the banking sector. Bad loans are a particular problem for Southern Europe, especially for Italy. The gradual normalisation of the interest rate level also in the euro zone will support the banking and financing sector towards the end of the year, but the writing off of bad loans is an issue in itself. This is why the capitalisation rounds in key Italian banks and the entire political setup in Italy as the parliamentary elections approach form a signifi-cant element for European stocks. While the earnings

growth forecast for the DAX index in Germany for this year is +11% (and +7% for next year), Italian companies on the MIB40 index are expected to achieve +14 per cent earnings growth next year. We will maintain our moderate overweight recom-mendation for European equities and our portfolio weights within equities and, similarly, a moderate underweight rec-ommendation for US equities. In the US, the earnings growth expectation for this year is +10.4% and +12% for next year on the S&P 500 index. These have not experi-enced any major changes; the only new significant factor has been the weakening of the dollar in the early part of the year.

Current Situation

Earnings forecasts strong in Europe

The Future

The positive economic momentum currently seems the strongest in Europe in relative terms. Real economy statis-tics support sentiment indicators’ dramatically improved outlook for the future. The ECB’s support purchases on the bond markets and extremely low interest rates are working behind the scenes to speed up economic growth and infla-tion. The weakening of the euro from its 2014 record highs by as much as 26% against the dollar (now 20%) supports European companies and, in the end, also earnings mo-mentum. Changes in the competitiveness of economic areas are, however, much slower than the movements on the currency markets. It is safe to assume that the ECB wishes to prolong its stimulating monetary policy as long as possible and at the same time to thus curb the pressure on the euro to strengthen, as long as no significant growth pressure is expected in inflation expectations. Due to the positive outlook, assets are still flowing steadily on the Eu-ropean equity markets both through ETFs and fund invest-ments and we expect this trend to continue in the summer. In the US, economic figures are essentially in good

shape although GDP growth for the first quarter failed to meet expectations. GDP growth for the current quarter is currently estimated to be as high as 3% but real economic data is no longer enough to surprise the even more posi-tively charged sentiment indicators and other surveys. The stock markets are, however, enjoying a positive investment flow in the US as well. The lightening up of corporate taxa-tion (possibly even to 15%) in accordance with the presi-dential administration’s plans will not have time to affect this year’s results but can impact sentiment, however. All in all, the fall in the unemployment rate, the relatively good level of domestic demand and the recently slightly weakened dollar are maintaining a positive momentum also in the US equity markets. The historically low level of equity market price volatility is also supporting the increases in retail in-vestors’ equity weights in the US. We will maintain equities at neutral weight coming into June.

We will maintain our neutral recom-mendation for eq-uities



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Alternative Investments

We will not make significant changes in alternative investments; instead we will maintain our allocation recommendation at moderate overweight. Resulting from a low interest rate, assets will flow steadily into various more illiquid investments globally. Credit risk premiums in this area have fallen somewhat due to high demand. We are maintaining our recommendation for private debt at moderate overweight. Cash has been invested in European private debt funds at a good rate, on average. The situation has not changed signifi-cantly in the investments we have selected or in their target market. Companies are, however, refinancing their financing price at an acceler-ating pace similarly as on the bond markets. According to the analysis of the research company Preqin, private equity funds contained a massive USD 820 billion in cash globally (USD 755 billion at the end of 2015) so there should be enough ammunition if opportunities should arise. The convertibles markets did not provide any major surprises. The convertibles market, just like the corporate bond and equity market, rose for the most part, but the prices of metal and oil company converti-bles fell clearly. There were very few new bonds on offer in Europe in May, which caused the market’s valuation level (implicit volatility) to rise.

In absolute terms, the volatility factored in by the markets remains low. The sensitivity of the investment basket to the underlying equity market was more than 40% at the end of May.

The weights describe our recommendation in relation to each investor's investment plan's balanced situation.

This Market Review is based on the views of Mandatum Life Insurance Company Limited (Mandatum Life) and on assessments based on data collected from public sources. Mandatum Life gives no guarantee as to the validity or completeness of the presented information, views or assessments, and Mandatum Life does not assume any responsibility for any direct or indirect damages, expenses or losses which may be caused by the use of the information contained in this Market Review. The assessments and views expressed in this Market Review are based on the data available at the time of its release into the public domain and Mandatum Life reserves itself the right to change its views or its assessments without any prior separate announcement. This Market Review and the information, assessments and views contained in it are all provided solely with the purpose of informing, and this Market Review should not be seen as a recommendation to subscribe to, to hold on to or to trade specific targets of investment or to implement any other actions affecting the value development of an insurance policy. The policyholder should examine with care the terms and conditions and brochures related to the insurance policy and investment targets before signing the insurance policy, before changes are implemented in the insurance policy, and before selecting or making changes in the selection of investment targets.


Market outlook (change to previous month)1 2 3 4 5 6 7 8 9 # # # 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6

Fixed Income: Neutral (=) 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 2 2 3 3 3 3 3

Europe money markets: Neutral (=) 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3

Europe government bonds: Underweight (=) 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Investment grade: Moderate overweight (=) 2 2 2 2 2 2 2 2 2 2 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4

High yield and structured products: Moderate overweight (=) 4 4 4 4 4 5 5 5 5 5 5 5 5 5 4 4 4 4 5 5 5 5 5 5 5 4 4 4 4 4

Senior loans: Moderate overweight (=) 5 5 4 4 4 4 4

Emerging market bonds: Underweight (=) 3 3 3 3 3 3 3 2 2 1 1 1 1 1 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1

Inflation: Moderate underweight (=) 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Equities: Neutral (=) 4 4 4 4 4 4 4 4 4 4 4 4 4 4 3 3 3 3 3 3 3 3 3 4 4 3 3 3 3 3

USA: Moderate underweight (=) 3 3 3 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 2 2 2

Europe: Moderate overweight (=) 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4

Finland: Neutral (=) 2 2 2 2 2 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 3 3 3 3 3

Scandinavia: Moderate overweight (=) 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4

Japan: Underweight (=) 2 2 2 3 3 3 3 3 3 3 3 3 3 4 4 3 3 3 3 2 2 1 1 1 1 1 1 1 1 1

Emerging markets: Neutral (=) 3 3 3 3 3 3 3 3 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3

Alternative Investments: Moderate overweight (=) 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4

Private equity: Moderate underweight (=) 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Private debt: Moderate overweight (=) 4 4 4 4 4 4 4

Real estate: Moderate overweight (=) 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4

Convertible bonds: Moderate overweight (=) 5 5 5 5 5 5 5 5 5 5 5 5 5 5 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4

Commodities: Neutral (=) 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

* Explanations: 1 = Underweight, 2 = Moderate underweight, 3 = Neutral, 4= Moderate overweight, 5 = Overweight

Monthly recommendations 1/2015 - 6/2017*


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Allocation Recommendation

Market Outlook Summary Changes in Recommendations

7 June 2017

Risky asset classes have yielded well in the early part of the year and May was no exception. Equity and corporate bond pric-es rose following the positive mood resulting from a successful Q1 earnings season. Eco-nomic indicators are nicely in the black in Eu-rope, but the US and China are experiencing a slight decline in companies’ confidence indi-ces. The equity markets continued this year’s upward trend practically throughout the main markets. The rise in European equi-ties in Western stock markets continued more strongly than in the US thanks to a rise of +9.8% in the Stoxx 600 index from the start of the year. Similarly, in the US, the S&P 500 yielded +8.7% but if euro investors have not hedged their dollars, the return has remained at +1.1% due to the weakening of the dollar this year. Money flows on the equity markets are still net in favour of Europe, actually strengthening in the wake of the French presi-dential election. The interest rate level remained more or less unchanged in May in both the US and Europe. The ECB is, for now, unwilling to signal a more specific timetable for the winding down of its super-stimulating measures – we expect this to take place in the latter half of the year, however. The first interest rate hikes by the ECB have been forecast to take place at

the end of 2018. According to our insight, the next US key interest rate hike will take place already in June. Strong employment figures are fuelling wage-push inflation (approx. +3% year-on-year growth at the moment), which gives the Fed no reason to maintain its current stimulus level.

MANDATUM LIFE INSURANCE COMPANY LIMITED POSTAL ADDRESS P.O. BOX 627, FI-00101 HELSINKI, FINLAND REGISTERED OFFICE AND ADDRESS BULEVARDI 56, FI-00120 HELSINKI, FINLAND BUSINESS ID 0641130-2 WWW.MANDATUMLIFE.FI

We are not making any significant changes to our allocation recommendation coming into June. We will maintain our neutral allo-cation recommendation for equities and fixed income. Correspondingly we will maintain our moderate overweight recommendation for alter-natives. The rising equity markets, particularly in the US, have increased valuation levels and, al-so in Europe, equities are priced higher than the historical average. The equity markets are supported by strengthening corporate earn-ings and a slight improvement in global eco-nomic growth. Globally, money continues to flow towards the equity markets. Within the equity markets we are downgrad-ing Brazil and Latin America to moderate un-derweight. The decline in industrial raw ma-terials in the early part of the year added to Brazil’s economic risks in particular. In addition the country was shaken by a political crisis linked to the corruption allegations levelled at the President. Companies’ earnings forecasts have taken a slight downward turn, but valua-tion levels are close to long-term averages. We will maintain fixed income investments at neutral weight. Credit risk premiums on fixed income investments have fallen further this year, which has manifested as positive stock price development but lower yield expec-tations on fixed income investments. Economic growth forecasts are still positive. We will maintain alternative investments at moderate overweight. Due to a low interest rate level, returns offered by alternative invest-ments are relatively attractive to investors for whom limited liquidity is not a problem. Money flows are expected into alternative investments in the medium term when investors seek alter-natives for low-yield fixed income investments.

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Allocation Recommendation 7 June 2017

Fixed Income

(Applicable investment basket, fund or ETF)

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Money Markets, Europe ML Money Abs

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We will maintain money market investments, i.e. short-term invest-ments, at neutral weight. Given the current low interest rates, the mon-ey markets do not produce yields in excess of the inflation rate. The price risk in money market investments is very low, however. In our allocation recommendation, money market investments mainly serve as a temporary ‘deposit box’. Due to falling return levels we have recently allowed the weight of cash to rise slightly in our portfolios.

Government Bonds, Europe iShares Global Government Bond UCITS ETF (EUN3)

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We will maintain government bonds at underweight. Return opportuni-ties are few due to a low interest rate level that is rising because of an im-proving macro picture. In Europe, the interest rate level at the end of May was higher than at the start of the year and the trend is still slightly ascend-ing. The yield level of Germany’s 10-year government bond, which bottomed out at -0.2%, rose to around +0.3% at the end of May. The interest rate differential between France and Germany narrowed due to Macron’s victory but the interest rate differential between Italy and Spain grew moderately, reflecting the political risk.

Corporate bonds, investment grade iShares Core Euro Corporate Bond UCITS ETF (EUN5) iShares US Corporate Bond UCITS ETF (LQDE)

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We will maintain low-risk investment grade corporate bonds at moder-ate overweight. In the United States, the credit risk premiums of invest-ment grade bonds were at a higher level than in Europe, as a result of which we have gradually increased the share of American bonds in our portfolios. For around a year, the ECB has also purchased low-risk corporate bonds, which has brought down the yield level on European bonds. The low yield levels give good reason to be selective at the moment.

Corporate Bonds, high yield ML Nordic High Yield Abs ML Euro High Yield iShares Core High Yield Corporate Bond UCITS ETF (EUNW)

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We will maintain high yield corporate bonds in moderate overweight. The low interest rate level is steering investors to seek returns in riskier alternatives, which is also leading to increased demand on the high yield market. On the European high yield market, yield levels have fallen to a very low level. The Nordic countries currently offer higher yield potential, for ex-ample, the running yield of the ML Nordic High Yield investment basket is at around 6.3%. We thus see value especially in select Nordic names.

Emerging market debt ML Emerging Markets Bond Index iShares J.P. Morgan $ Emerging Markets Bond UCITS ETF (IEMB) iShares Emerging Markets Local Government Bond UCITS ETF (IUSP)

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We will maintain emerging fixed income markets at underweight. High-er raw material prices have improved the outlook for many emerging coun-tries. Inflation expectations have risen due to the rise in raw material prices. We favour bonds listed in local currencies. The weakening of the dollar is putting a strain on economies selling oil which indirectly also impacts locally listed bonds.

Senior Loans

ML Senior Loan II

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We will maintain secured senior loans at moderate overweight. The yield level on European senior loans has tightened along with the rest of the market. However, in the current environment the floating rate coupon, which hedges against rising interest rates, favours investing in senior loans. The liquidity of senior loans is lower than that of listed bonds, which means that investors must be ready to tie down their assets for a longer period.


Asset classes (Applicable investment basket, fund or ETF)

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Fixed income ML Fixed Income Portfolio Abs

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We will maintain fixed income investments at neutral weight. Credit risk premiums on fixed income investments have fallen further this year, which has manifested as positive stock price development but lower yield expectations on fixed income investments. Economic growth forecasts are still positive. The weakening of inflation expectations has reduced the up-ward pressure on interest rates. In the US, however, the Fed is expected to stay firmly on its interest rate hike path and to begin reducing its balance sheet. In Europe, the ECB will probably examine the continuation of its stimulus programme after the summer. Any reduction in stimulus measures would increase the upward pressure on interest rates.

Equities iShares MSCI All Country World ETF (ACWI)

Main

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We will maintain equities at neutral weight. The rise in equity markets, particularly in the US, has increased valuation levels and, also in Europe, equities are priced higher than the historical average. The equity markets are supported by strengthening corporate earnings and a slight improve-ment in global economic growth. Globally, money continues to flow towards the equity markets.

Alternative Investments ML Alternative Mandate

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We will maintain alternative investments at moderate overweight. Due to a low interest rate level, returns offered by alternative investments are relatively attractive to investors for whom limited liquidity is not a problem. Money flows are expected into alternative investments in the medium term when investors seek alternatives for low-yield fixed income investments.


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Equities (Applicable investment basket, fund or ETF)

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Developed markets ML Future Climate ML Future Quality Equity iShares Core MSCI World UCITS ETF (EUNL) iShares MSCI World EUR Hedged UCITS ETF (IBCH)

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We will maintain developed markets at neutral weight. Generally speaking, the valuation factors of equities exceed the long-term median, but companies’ earnings forecasts are rising in key markets and key confidence indicators are strong. In the US and Europe monetary policy is moving along a tightening path while Japan is carrying on with its highly expansionary policy. Emerging market equities continue to offer attractive return potential, particularly against the low interest rate level.

Europe, large caps

ML Europe Equity iShares Core EURO STOXX 50 UCITS ETF (SXRT)

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We will maintain major European companies at moderate overweight. Economic data is strengthening. The valuation level is above the long-term median but companies’ strengthening corporate earnings support equities. In addition to central bank news, political risk is another factor possibly increasing share price volatility. Following Macron’s victory, the markets forecast a higher likelihood for euro zone reforms which has had a positive impact on the equity markets.

Europe, SMEs ML European Small & Mid Cap iShares STOXX Europe Small 200 UCITS ETF (SCXPEX)

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We will maintain our moderate overweight recommendation for European SMEs. The growth outlook for small cap companies is better than for large cap companies, and domestic markets account for a bigger part of small cap companies’ turnover, which is why they are better positioned than large cap companies to benefit from an economic pickup. Valuation levels are more mod-erate due to improved earnings power. However, active portfolio management is all the more important with regard to small cap companies.

Finland ML Finland Index iShares MSCI Finland Capped ETF(EFNL)

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We will maintain Finland in neutral weight. Europe’s recovering economic growth will offer export companies the assistance they have been looking for, but economic growth has also strengthened on the domestic markets. Earnings growth forecasts are rising but the valuation level is slightly above the historical average.

Scandinavia

ML Nordic Equity iShares MSCI Sweden ETF (EWD) iShares MSCI Norway ETF (ENOR) iShares MSCI Denmark ETF (EDEN)

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We will maintain Scandinavia in moderate overweight. The valuation level is slightly above the historical average but earnings growth forecasts are on their way up. The possible strengthening of the Swedish krona through the central bank’s interest rate hikes would improve euro-denominated returns. Discerning investors can find opportunities in specific industries and in individual compa-nies.

United Kingdom

ML United Kingdom Index iShares MSCI United Kingdom ETF (EWU)

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We will maintain the UK at moderate underweight. The Brexit process creates uncertainty, which is likely to limit companies’ investment appetite. How-ever, key confidence indicators have remained at a good level and earnings growth forecasts are on the rise. A weakened pound has also boosted exports and diminished the trade deficit. The valuation level of the equity market is above the historical average.

USA ML USA Index

iShares Core S&P 500 ETF (IVV)

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We will maintain the United States in moderate underweight. Economic growth is expected to remain moderate but recent economic data has been weaker than expected. The valuation level is above the historical median and higher than in Europe, for example. Uncertainty concerning the materialisation of Trump’s tax cuts has increased since no agreement has been reached concern-ing the budget deficit and its sources. Similarly, increases in infrastructure ex-penditure are uncertain. Uncertainty is being maintained, in addition, by a possi-ble shift towards a protectionist trade policy.

Japan ML Japan Index iShares MSCI Japan ETF (EWJ)

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We will maintain Japan in underweight. The valuation level on the equity markets is above the historical average and the impact of the massive stimulus measures on companies’ earnings performance has been weaker than ex-pected. In the long term, Japan’s biggest challenge is its ageing population.

Australia ML Australia Index iShares MSCI Australia ETF (EWA)

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We will maintain Australia in moderate underweight. As a raw-material-based economy and due to its location, Australia will benefit in the long term from the growth in Asia. Especially the Australian gas industry is growing as China’s demand continues to rise. Earnings growth forecasts have risen slightly due to higher raw material prices. The valuation level is above the historical average, however.

Emerging markets ML Emerging Markets Equity iShares MSCI Emerging Markets UCITS ETF (IQQE)

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We will maintain emerging markets in neutral weight. Different markets find themselves in very different situations as raw material prices and geopoli-tics, among other things, affect countries in very distinct ways. The valuation levels of equities are cheaper than on the Western markets and earnings growth forecasts are rising. Any trade barriers planned by Trump will create uncertainty, although significant trade barriers, for example, for China are considered less likely than earlier.

Russia ML Russia Index iShares MSCI Russia ADR/GDR UCITS ETF (CSRU)

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We will maintain Russia at moderate underweight. Russia’s economy is burdened by the EU’s sanctions and Russia’s counter-sanctions. The rise in the oil price has, however, reflected positively on the equity markets. The valuation level has risen but, at the same time, earnings forecasts have also begun to rise. Geopolitical tensions are preventing the starting up of foreign investments, which are essential for long-term economic growth.

Allocation Recommendation



7 June 2017

(8/8)

Allocation Recommendation 7 June 2017

This Market Review is based on the views of Mandatum Life Insurance Company Limited (Mandatum Life) and on assessments based on data collected from public sources. Mandatum Life gives no guarantee as to the validity or completeness of the presented information, views or assessments, and Mandatum Life does not assume any responsibility for any direct or indirect dam-ages, expenses or losses which may be caused by the use of the information contained in this Market Review. The assessments and views expressed in this Market Review are based on the data available at the time of its release into the public domain and Mandatum Life reserves itself the right to change its views or its assessments without any prior separate announcement. This Market Review and the information, assessments and views contained in it are all provided solely with the purpose of informing, and this Market Review should not be seen as a recommendation to subscribe to, to hold on to or to trade specific targets of investment or to implement any other actions affecting the value development of an insurance policy. The policyholder should examine with care the terms and conditions and brochures related to the insurance policy and investment targets before signing the insurance policy, before changes are implemented in the insurance policy, and before selecting or making changes in the selection of investment targets.


Equities (Applicable investment basket, fund or ETF)

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Brazil and Latin America ML Brazil Index ML Latin America Index iShares MSCI Brazil Capped ETF (EWZ) iShares MSCI EM Latin America UCITS ETF (IUSC)

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We will downgrade Brazil and Latin America to moderate underweight. The decline in industrial raw materials in the early part of the year added to Brazil’s economic risks in particular. In addition the country was shaken by a political crisis linked to the corruption allegations levelled at the President. Companies’ earnings forecasts have taken a slight downward turn, but valuation levels are close to long-term averages.

China ML China Index iShares China Large Cap UCITS ETF (IQQC)

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We will maintain China in moderate overweight. The central government is maintaining several actions to support the economy, housing markets and stock markets. In addition, the central bank has taken on a more expansive policy than before. The valuation level is above the long-term median but lower than on West-ern markets. Earnings growth forecasts have also begun to rise. In the long term, the structural reform of the economy and state-owned enterprises will also support the stock market.

India ML India Index iShares MSCI India ETF (INDA)

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We will maintain India at moderate underweight. The higher prices of oil and other raw materials reflect negatively on India, which is a net importer of raw mate-rials. In addition, the surprising monetary reform in late 2016 will have a negative impact on domestic demand. Prime Minister Modi seems to be achieving social reforms that will create a more favourable operating environment for companies. The rate of the reforms has, however, been slower than expected. The country is faced with significant long-term internal challenges caused by, among other things, an underdeveloped infrastructure.

Indonesia ML Indonesia Index iShares MSCI Indonesia ETF (EIDO)

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We will maintain Indonesia at neutral weight. While companies’ earnings forecasts have increased slightly, the equity market is already priced relatively high.

Frontier Markets ML Frontier Markets Index iShares MSCI Frontier 100 ETF (FM)

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We will maintain the frontier market countries at moderate underweight. This group includes markets with economic and financial infrastructures not yet on a par with the emerging economies. Companies’ forecasted earnings are trending down-wards, which has resulted in the valuation level slightly exceeding the historical average.

Alternative

Investments (Applicable investment basket, fund or ETF)

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Private debt ML Private Debt II

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We will maintain private debt investments at moderate overweight. Unlisted bonds are currently attractive to many investors with declining credit risk premiums on listed bonds. In contrast to good return expectations, the investor must, howev-er, be ready to accept limited liquidity and long-term commitment to the investment.

Convertible bonds ML Convertible

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We will maintain convertible bonds at moderate overweight. Convertible bonds are a good option in the current market situation for investors who want to take moderate equity risks. The narrowing of credit risk premiums and the rise in the equity markets are reflected positively also in convertibles. The outlook remains positive.

Real Estate iShares Developed Markets Property Yield UCITS ETF (IWDP)

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We will maintain real estate in moderate overweight. At the current interest rate level, the return levels offered by real estate appear to be relatively more attractive. Real estate offers stable returns particularly for investors who are less concerned by liquidity requirements.

Commodities iShares Dow Jones-UBS Commodity Swap (DJCOMEX)

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We will maintain commodities at neutral weight. The OPEC countries reached an agreement on oil production volume cuts at their meeting at the end of Novem-ber, after which the price of oil has stabilised between 50 and 60 dollars. The stabi-lisation of the market requires, however, that countries outside the OPEC countries implement cuts and refrain from increasing their production. The prices of industrial metals and, to some extent, agricultural commodities have continued to rise this year with the improving global economic growth outlook.

Gold ML Gold Index iShares Physical Gold ETC (IGLN)

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We will maintain gold at neutral weight. In November-December, the price of gold was on its way down, with the demand for safe haven assets falling as the stock markets rose, but has taken a moderate upward path this year. Traditionally, gold has also been purchased to hedge against inflation but also this demand has fallen to a low level despite the rising inflation expectations.


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