Stock Picking Remains Key in 2017
A semi-annual overview of the most important drivers for global equity and credit markets
The Equity & Credit Sector Monitor provides a semi-annual overview of the bottom-up fundamental drivers across all sectors, and furthermore presents our most and least favored stock and bond recommendations for each sector.
The turbulent and volatile second half-year was characterized by trigger events such as the surprise outcome of the Brexit vote, heightened expectations about the pace of interest rate hikes and, last but not least, the correction and subsequent year-end rally after the surprise US election victory of Donald Trump.
In 2017, economic growth should improve but only slightly, according to our economists. However, earnings growth forecasts are still a bit too high, in our view, as valuations are above historic levels and (geo)political risks remain high, especially in Europe. Thus, we believe stock picking has become more important going into 2017. The latest Equity & Credit Sector Monitor provides an overview of sector trends and valuations as well as a list of stocks that we believe are most promising for 2017.
Equity: Healthcare and IT Are the Most Favored Sectors
In the global equity market, we see Healthcare and Information Technology as the most favored sectors and expect them to outperform. Both sectors have lagged the overall equity market recently, but due to valuations and the long-term growth outlook we see this as an opportunity. We see the upside for Technology companies being driven by innovation, cloud computing, the Internet of Everything/Big Data, security, virtual/augmented reality, and newly also robotics/Industry 4.0.
We also think Healthcare stocks are well positioned and should profit from the "genomic revolution" of understanding disease and possible avenues of cure at an ever-increasing speed. Scientific progress and a focus on innovation support the development of novel therapies, which should support premium pricing despite price sensitivity, and thus sustain or expand margins.
Cautious on Consumer Staples & Industrials
The low-growth environment coupled with the impending US rate hike leaves us cautious on Consumer Staples, and we expect the sector to underperform. We also expect the Industrials sector to underperform, as the valuations of global industrials stocks are close to peak levels and we believe a premium is unjustified given that the growth outlook is worse than it has been over the past decade.
Credit Side: Positive for Automotive, Building Materials and Subordinated Financials
On the credit side we prefer the Automotive, Building Materials and Subordinated Financials, as those appear attractively situated in markets where growth and reform momentum are picking up. Besides the Automotive and Building Materials sectors, the Metals & Mining sector should also benefit from emerging market resilience.
We remain rather cautious on Pharmaceutical bonds with an underperform stance as, with quasi-sovereign characteristics, the bonds could suffer from underperformance in a Bund yield correction.