We remain constructive on global equities as they will be supported by widespread economic expansion.
In the US, prefer IT, industrials and financials.
The eurozone, Switzerland and Japan are well positioned to benefit from the global economic recovery.
Brexit talks leave us cautious on UK equities.
Tax cuts could boost US equities
"If the rise in long-term rates is gentle and the corporate tax rate is eventually cut, the US market will enjoy a positive economic context."
Global equities – stay constructive. Global equities will see their earnings boosted by the global recovery. The stronger profits will come from higher revenues and wider margins as wage growth stays contained. Monetary policy normalisation will not be a negative, provided bond yields don’t spike.
US – tax cut a potential boost. They will remain underpinned by a strong recovery and solid growth in earnings-per-share. A blueprint for tax reform is to be released soon. Although few details have emerged so far, a cut in the 35% statutory corporate tax rate would boost profits. Domestic companies with high effective tax rates will be the main beneficiaries while US multinationals already pay lower rates. However, funding conditions will turn less favourable in coming months as the Fed normalises its monetary policy. Higher bond yields could reduce overvaluations: almost all metrics are at decade highs. For instance, from a Shiller P/E standpoint, the US market has only been more expensive twice before: in the late 1920s and during the tech bubble of the late 1990s. While current valuations suggest weak long-term returns, they have proved a poor predictor of short-term performance as markets can overshoot fundamentals – our central scenario.
Sector-wise, we prefer cyclical areas likely to benefit from stronger global trade and higher capital spending, e.g. IT or industrials (despite high valuations). Financials should also benefit from solid domestic demand and rising yields.
Eurozone and Switzerland to perform well
"In the eurozone, cyclical sectors (industrials, IT) and financials will be the prime beneficiaries of the global economic recovery and rising interest rates."
Eurozone – earnings growth to remain strong. Eurozone equities briefly suffered from a stronger euro this summer. They have recovered since, supported by the global economic recovery and the ECB’s accommodative monetary policy. Next year, the central bank is likely to reduce its asset purchases only gradually, keeping rates unchanged as wage growth remains contained. This will help earnings and margins improve further. Although forecasts have been revised down over the past months following the euro’s rally, EPS growth should remain strong. The IBES consensus is for 11.3% in 2017 and 8.4% in 2018.
Sector-wise, cyclicals (IT, industrials) and financials will be the prime beneficiaries of the global economic recovery and rising interest rates.
Switzerland – a global bet. Despite a market structure tilted towards defensive sectors (healthcare and consumer staples account for nearly 50% of the SMI’s capitalization), Swiss multinationals should continue to benefit from strong business confidence, very loose monetary policy and a weaker franc. EPS are projected to grow 8% this year and 11.7% next year after two years of decline.
Sources: SGPB, Datastream, 15/08/2017. Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.