Interactive Investor

Three major investment themes for 2017

29th November 2016 10:00

Dominic Rossi from ii contributor

Dominic Rossi, global chief investment officer for equities at Fidelity, reveals the big trading ideas he believes investors should be watching in 2017.

America First

While the Trump election outcome was a surprise to many, myself included, the market reaction has been fundamentally rational. Trump: "the man" may be many things, but Trump: "the administration" will be all about growth.

In terms of global equity markets, this growth story implies a reassertion of US market leadership as investors re-focus on economic and corporate earnings growth. After two flat years for US earnings, we were already seeing a fundamental improvement in US earnings growth.

We are currently forecasting aggregate US earnings growth of 11.2% in 2017 and a return on equity (ROE) of 16.2%, based on our proprietary fundamental earnings models for individual stocks.

Even if we see a more protectionist scenario, the US market would be the most resilientA corporate tax rate cut - even from 35% to 25% (rather than the more fanciful 15% that was suggested pre-election) - would boost earnings by 10% and make the US the standout stockmarket for earnings growth and returns on equity.

Add to this the fact that US companies have over $1 trillion (£802 billion) trapped offshore, according to S&P 500 company balance sheets. Unlocking this cash would support mergers and acquisitions, capital expenditure, and even better returns to shareholders via dividends and buybacks.

Indeed, the election slogan of "America first" should also be the mantra of investors in 2017.

Even if we were to see a more protectionist scenario, the US market would be the most resilient, given it is largely domestically driven by an embedded 401K pension savings culture.

Developed beats emerging markets

The outlook for other developed equity markets is supported by the fact that global economic growth will benefit from a stronger US economy.

We are at the start of a new upswing in activity, and developed markets have scope to be more bullish on global growth, with protectionism the main threat to be factored in over time.

A stronger dollar is a headwind for commodity pricing and some emerging economiesEuropean markets will be beneficiaries of this improving growth environment, although we could see some politically-inspired volatility around the forthcoming elections in France, the Netherlands and Germany.

The impact on emerging markets is likely to be more mixed. While stronger US and global growth is ostensibly a positive backdrop for emerging market equities, this is only the case in the absence of protectionist measures.

Now, having the US as a key trading partner is being viewed as something of an Achilles' heel for certain emerging economies, at least until there is more clarity on trade and tariffs.

Critically, a stronger dollar environment - in the short to medium term - is a financial headwind for commodity pricing and certain emerging economies.

There is also a possibility that spare production capacity in markets outside the US is sucked into the US as industry value chains are disrupted, which would have a counterbalancing impact on US inflation at a time of fiscal stimulus.

Financials, pharmaceuticals and tech to prosper

In terms of equity sectors, I think pharmaceuticals and financials will both benefit from a more favourable regulatory environment under a Republican administration. Financials and real-asset related stocks will benefit from the prospect of a reflationary policy mix of stronger growth, higher inflation and higher interest rates.

Pharma stocks weakened on the prospect of a Clinton win pre-election due to concerns over possible price capping. The Trump administration is expected to take a softer stance on regulation.

We have long favoured healthcare stocks for their attractive earnings and dividends against a backdrop of structural demand.

We continue to see strong innovation that is delivering healthy pipelines of new drugs and therapies, especially in oncology, immunotherapy and virotherapy. Our portfolio managers used attractive valuations around the election to add to positions.

US tech stocks could be boosted by tax reforms to repatriate foreign earningsBank balance sheets have been incrementally improving for some time, but a pick-up in US and UK inflation and the Trump presidency all put wind in the sails of an emergent reflation story.

Given the positive economic backdrop and the prospect of growth-focused fiscal stimulus, we are positive on developed market financials.

The regulation of US banks under Trump is likely to be more favourable. Some US banks are trading close to book value with single-digit ROEs. If these ROEs were to improve to double digits and book values move to 1.5 times, we could see significant gains in share prices.

We continue to see value in tech stocks - the best companies are able to sustain attractive earnings growth via innovations in their business models, operations, logistics or end-customer offerings.

A selective approach is required, though. While not obvious beneficiaries of a Trump administration, particularly if we were to see protectionism, US tech stocks could be boosted by tax reforms to repatriate foreign earnings and an "America First" approach that disrupts established global supply chains back to the US.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.