Abu Dhabi 17 January 2017
We broadly favour equities over fixed income, especially in the US. Capital expenditure should recover strongly during 2017 and we believe that productivity will improve, helping equities even more.
Looking at history, only Fed funds above about 4% significantly hurts equities. We are entering a ‘late-cycle’ environment, but it will be elongated, fueled by the Trump Administration. The prospect of lower capital gains for US assets should encourage investors to delay taking profits, keeping US equities underpinned.
We expect US equities to do rather better than the 4-5% performance generally expected for 2017, with corrections along the way in a market that we think has further to run in 2017. The S&P500 is on a P/E of 17.5x for 2017, and 15.6x for 2018, based on earnings growth of 11.8%. Valuations are not stretched. The EuroStoxx 50 is on a P/E of 14.8x for 2017, falling to 13.0x for 2018, based on earnings growth of 10.5%. The Nikkei 225 is on a P/E of 19.2x this year and 17.3x for 2018, based on earnings growth of 10.7%. For both European and Japanese equities, currency hedges should remain in place.
Technology looks good
Analysts have continued to upgrade (especially US) banks and other financials as well as cyclical stocks. Technology also still looks good. Healthcare and Utilities will continue to lag next year we feel (although within Healthcare, Biotech has some potential). Active managers are thought to still be underweight in cyclicals and interest-rate sensitive stocks like Financials, Energy, Materials and Industrials. Proposed corporate tax reform should particularly benefit US financials, as they pay high tax rates. In emerging markets, selectivity will be the key theme next year. We are contrarian in being overweight Indian equities, based on our medium-term view. Overall we still favour the commodity consuming economies of the emerging markets over the commodity producing ones. Crude oil prices have been very much led by politics in 2016, rather than the demand/supply balance for oil. We are overweight in MENA equities, with a fundamental belief that the worst may be over for oil prices, which obviously heavily dictate market direction.
We prefer equities above all other asset classes, favouring developed markets over emerging markets. The US and Eurozone are our two top equity market selections for 2017.
Extracted from the Global Investment Outlook 2017