All this week, Morningstar.co.uk will be bringing you a Guide to Investment Ideas for 2017; stock picks, market reactions and political forecasts from the investment professionals.
Larry Puglia, T. Rowe Price US Blue Chip Equity
S&P 500 earnings should rebound in 2017 and 2018, reflecting a sharp improvement in energy; however, analyst projections have sometimes been optimistic, so some caution is warranted. We do not expect gradually rising interest rates over the next 12-18 months to be a stumbling block for equities. In the US equity markets, defensive low-volatility sectors like utilities, telecom and staples have outperformed, but this trend may be changing as we enter 2017. Information technology and health care are the industry sectors with the most attractive valuations.
Sebastian Radcliff, Jupiter North American Income
The effect of starving returns by keeping interest rates at zero and driving bond yields to historically unprecedented levels only made the relative appeal of anything bond-like that much more valuable. Initially this meant utilities, then Real Estate Investment Trusts and eventually anything that had a meaningful dividend: ultimately this has meant all long duration assets, which would include ‘glamour growth stocks’ such as Facebook or Netflix.
The result, as with every other stock market fashion, has been to drive these valuations beyond fair value. Because financial repression has gone on for so long, not just in the US but across much of the world, overvaluation has become a much broader problem than in past market cycles, as with technology in 2000, which was much more concentrated.
As a consequence the smorgasbord of equities and assets that have ridden the coat-tails of bond yield compression that encompasses utilities all the way to aggressive growth stocks will now be at risk. This will likely be the catalyst for reversion of the significant diversion between ‘growth’ and ‘value’ investing styles that has seen value shares trail benchmarks in the past few years: the same kind of environment that we have been waiting for patiently.
Financials that nobody wanted to own when bond yields were going down are suddenly in the Trump sweet spot of being one of the few areas that should benefit from both improving growth, less regulation and most importantly rising interest rates. This along with other cheaper shares are likely to serve investors better than all the varied beneficiaries of financial repression for whom the outlook is looking cloudier.
Jeremy Podger, Fidelity Global Special Situations
Recent investor sentiment towards equities improved markedly after the Trump victory in the US presidential election, with his proposals around fiscal stimulus and protectionist policies being viewed as reflationary for the US economy. This makes US domestic businesses relatively attractive and this is reflected in the new relative highs such stocks have been hitting.
In the short-term, the prospect of a stronger US currency and protectionist measures has put the recovery in emerging markets on hold. This is likely to be temporary, as it is difficult to see wide ranging anti-trade measures.
From a sector perspective, technology companies catering to the new economy and health care businesses supported by innovation but less susceptible to drug pricing concerns continue to look interesting. Among cyclicals, integrated energy businesses offer greater value than upstream companies while miners remain susceptible to long term demand concerns. Banks as a whole are unloved and here there may be selective investment opportunities. In contrast, most bond proxies remain expensive.
