Market Sector Update

• Global equities as a whole were flat during the quarter. The U.S. was a standout performer (up approximately 3%). European markets were up in local currency, though posted slightly negative performance in U.S. dollar terms. The U.S. dollar rebounded strongly over the quarter, gaining approximately 4% versus a basket of other currencies. Emergingmarket equities underperformed – as demonstrated by a 13% local currency decline in Chinese A shares. Additionally, many emerging-market currencies were particularly hard hit and detracted from market performance.
• Conviction of continued solid global gross domestic product (GDP) growth remains. We believe the Tax Cuts and Jobs Act passed at the end of 2017, along with higher federal spending, will serve as a tailwind to economic growth in 2018 and into 2019 via increase business and consumer spending. However, inflation concerns and a higher-thanexpected U.S. Federal deficit have added to concerns of unsustainably strong economic growth.
• During the quarter, the U.S. Federal Reserve (Fed) expectedly raised rates and indicated they plan on two additional rate increases in 2018. The Fed has stated they will continue on the path to unwind its multi-trillion-dollar balance sheet, which the market anticipates.
• The European Central Bank (ECB) began to taper its bond purchases in early 2018, and their first rate increase is expected during the fourth quarter of 2019. The ECB has focused its attention on getting the banking system fit to handle any additional shocks by pushing for more capital into weaker Italian, German, Spanish and Greek banks as well as sales of non-performing loans to third parties.
• Emerging-market growth is now under pressure from the combination of a stronger U.S. dollar and higher oil prices. The outlook is further clouded due to aggressive U.S. trade policy and rhetoric regarding numerous nations, with China being a particular focus of escalating tariffs. These headwinds could result in sales and earnings pressure for multinational and emerging-market companies.

Portfolio Strategy

• The Portfolio outperformed its benchmark for the quarter, led by strong sector allocation and currency effects. Of note, an overweight allocation to the strong-performing energy sector and underweight allocation to the poorperforming financials sector aided performance. From a currency standpoint, hedges stemming from the U.S. dollar strengthening versus the euro aided performance. Additionally, the Portfolio’s overweight allocation to the U.S. (a relative overweight to U.S. dollar-denominated securities) benefitted performance due to U.S. dollar strength. At quarter end, the Portfolio maintained no currency hedges.
• At the country level, stock selection in the U.S. detracted to performance, though this underperformance was partially offset by strong selection in Europe and Asia-Pacific ex Japan. The Portfolio’s underweight allocation to emerging markets benefitted performance for the period.
• As the quarter progressed, we increased exposure to the energy sector, while lowering exposure to the consumer discretionary sector. The Portfolio’s largest sector overweights include information technology, energy, health care and materials where we continue to find companies we believe provide good dividend yields and reasonable growth potential relative to their valuations. The Portfolio is underweight financials, consumer discretionary and telecommunications due to those sectors’ poor fundamentals, growth prospects and less attractive relative valuations.
• We have increased the Portfolio’s overweight allocation to Europe at the expense of the U.S., as we believe the European holdings offer a better risk/return and dividend profile. We also believe European political fears will continue to subside over the next few years, which should bode well for the region and increase investor interest. The Portfolio maintains underweight allocations to developed Asia (Japan, Australia) and non-Asian emerging markets.

Outlook

• We think global economic growth will remain moderate as we move through 2018 and 2019. We expect the U.S., Europe, China and some parts of emerging markets to be the main engines of growth. We anticipate moderate earnings growth, somewhat high valuations and a market environment with continued political and macroeconomic uncertainty in the U.S., Europe and Asia.
• We believe the largest macro risks include an expanding trade war between the U.S. and China, as well as higherthan- expected inflation. Nevertheless, bonds are becoming less attractive relative to equities and we believe this trend will continue if global inflation reaccelerates. We expect the Fed to enact additional rate increases in 2018 and 2019, as well as continue to shrink its balance sheet as planned. We believe the ECB will begin to raise rates during the fourth quarter of 2019, while continuing to taper its purchase of bonds.
• In Europe, political uncertainty has increased largely due the region’s inability to effectively manage and absorb a large population of refugees. The new Italian government is headed by a coalition of two parties that are Euro-skeptics, an environment that could induce increased instability to the region. We feel the U.K. faces additional long-term headwinds stemming from Brexit, as unknowns and “an uncertainty tax” will hurt its economy. In France, pro-business reformer Emmanuel Macron pushed through labor reforms. That said, we believe expectations for major European Union reforms look poor. Interests in the region are widely disparate, and leadership is slow moving and seemingly lacks the political capital necessary to drive substantive reform.
• We believe the odds of a recession are low as there has not been a boom in spending, excluding certain property markets around the world. The large U.S. tax cut should encourage capital investment and consumer spending in the near-term. Over the long-term, GDP growth should still occur in emerging markets and the U.S. due to better demographics. Currently, China is in a steady growth pattern with private sector spending offsetting a slowing of public spending. Besides GDP growth, the government is concerned about housing price rises (affordable housing) and controlling pollution. We believe any economic slowdown from a trade war will be countered by additional fiscal or monetary easing. China is still in a multi-year rebalancing to a more consumer-based economy. In our view, these changes could have lasting impacts throughout the global marketplace in shaping GDP growth, commodity prices and multinational profits. The country has strong top-down leadership and its massive Silk Road Project (linking China via rail, road or ports to a multitude of trading partners in Asia and Africa) will help sustain growth in the region. Over time, we believe companies that are well positioned in these markets should experience faster revenue and earnings growth than peers, a factor we reflect when considering the structural growth rates of businesses within various sectors the Portfolio invests.

The opinions expressed are those of the Portfolio’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Ivy VIP Dividend Opportunities was renamed Ivy VIP Global Equity Income on April 30, 2018.

Risk factors: The value of the Portfolio’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Dividend-paying investments may not experience the same price appreciation as non-dividend paying instruments. Dividend-paying companies may choose to not pay a dividend or the dividend may be less than expected. These and other risks are more fully described in the Portfolio’s prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.