Investment View Q1 2017
Considering the major events of 2016 – Brexit, the Italian referendum, Trump and the rise of nationalist China – are they just a coincidence? Things seem to change simultaneously and globally. If so, does this give rise to a more nationalistic, protectionist scenario? That would be an important shift, requiring us to rethink almost everything and portfolios should be adjusted accordingly.
Entering 2017, sentiment has rarely been better. The election of Donald Trump has enhanced the feel good factor. Plainly, the equity markets are seeing that something “good” is coming. Maybe, just maybe, the market is realizing that for the most part deal maker businessmen, who know how to get things done, will be running the government for at least the next four years.
Deflationary forces are diminishing. The U.S. enjoys record employment numbers; U.S. wages are creeping up and strict immigration policies and enforcement should enhance this inflationary pressure. But also outside of the U.S., the economies in Europe and Japan have entered a cyclical upswing. We see already some inflation returning in Germany.
Monetary expansion is on its way out being replaced by fiscal spending. U.S. bond yields are expected to rise further with the 10Y-Treasury yield perhaps even rising above the 3% level. Be prepared for corrections in the equity markets if this happens.
At the February 2016 lows, stocks were cheap based on forward earnings. Currently, that is not the case, at least on a short-term basis. After the Trump Win equity markets rallied 8-10% from overnight lows, bullish sentiment has leaped, bearish sentiment has collapsed, expectations for economic growth have soared, the Fed has raised interest rates with the expectation for three more increases in 2017, and based on trailing earnings, most equity markets are no longer cheap.
While we believe the equity markets’ earnings growth will allow stocks to grow into better valuations, in the near term, there could be a market stumble. This is just a short-term tactical trading call, because in the medium term we see limited downside as long as earnings come in somewhere near their estimated levels over the next several quarters. Any pullbacks should still be for buying, as we expect 2017 to be a good year for equities.
Our current strategy is to focus on the beneficiaries of an economic upswing and transforming world; from growth to value investing. Equities are the preferred investments over bonds as the latter still do not offer any value at the moment. Global stocks are likely to outperform U.S. stocks. Small cap stocks are preferred over large caps. Real assets such as Commodities and Real Estate represent value. Emerging market stocks and more specifically Asian equities also represent value.