Investment summary
2017 global equity outlook After a flattish 2016, we expect global equities to deliver higher returns in 2017 thanks to stronger economic growth, higher inflation prints and more active shareholder policies (M&A + share buybacks). Expect more political and policy uncertainty in the first half of the year. US protectionism is the main risk for global equities.
S&P 500 at 2400 by end-2017 The Trump agenda should push back the peak in equity markets to towards end-2018, at 2500 on the S&P 500. Our forecasts factor in a stronger but realistic pace of US economic growth (infrastructure spending), US corporate tax cuts and overseas cash repatriation. The current high valuation and further repricing of Fed hike expectations (i.e. higher cost of debt) prevent us from being more bullish.
Elections in Europe: opportunities beyond risks In Europe, similar causes are likely to have similar effects: a EuroSTOXX 50 at 3300 by end-2017 on our estimates. 2016 was rich in political events, as will be 2017. Two ‘surprise’ outcomes (Brexit and Trump) turned out to be ‘surprisingly’ well received by markets. On the Italian referendum (Dec 4), we see the ‘No’ as already priced in. The elections in France (in May) and Germany (in the autumn) could potentially be a source of stress (who trusts polls anymore?), but the outcomes could allow more fiscal easing.
Brexit is not priced in We are cautious on the FTSE 250, more domestic than the FTSE 100, as it is trading above its pre-referendum level despite the outlook for much lower GDP growth and much higher inflation. The FTSE100 should benefit from its value tilt, higher commodity prices and weaker sterling. Pension deficits should be kept in mind: bond yields may have risen of late (a tailwind) but so has inflation (a headwind). These could weigh on a number of companies.
Higher bond yields to impact equities We estimate that US equities could absorb the impact from a rise in 10Y bond yields up to 2.6%, and eurozone equities could absorb the impact from a rise in 10Y bond yields up to 1.0%. A brutal steepening of the yield curve and/or violent euro appreciation would be negative for eurozone equities, but this is not our scenario. The ECB tapering impact is more a serious headwind for highly geared stocks and sectors. At the country
level, this suggests favouring core Europe vs Peripherals and avoiding the SMI (full of bond proxies). This also favours Value style over Growth.
The great sector rotation has further to go After two years of the STOXX 600 posting only single-digit gains/losses, the onus of providing portfolio performance rests on sector allocation. The rotation this year has been massive, driven by the turnaround in the growth and inflation outlook, as well as, of late, shifts in earnings momentum. As we head into 2017, we engage more fully with this rotation out of long-duration/growth sectors into the value end and consumer
discretionary segment, with some large positions against the benchmark.
We are 300bp overweight in Consumer Discretionary, 200bp overweight in Oil & Gas and 150bp overweight in Financials. Conversely, we are 200bp underweight in both Telecoms and Utilities, and 150bp underweight in Consumer Staples.
Caught in the rotation tide: single stock outliers The moves in the recent major sector rotation have been pretty dramatic, with investors buying/selling whole segments of the market without always discriminating much between the stocks. SG analysts find SG Buy-rated KPN, Sky and Carrefour in the oversold camp, and sell-rated Fiat Chrysler, Credit Suisse and Deutsche Bank in the overbought camp – all of which have significant upside/downside potential (respectively) to our target prices.