Investing legend on why stocks should soar in 2017

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Investing legend on why stocks should soar in 2017

False fears set up 2017's surprise surge

False fears are bullish, so I love that 2017 is starting with two big falsehoods. One: The FTSE 100 (UKX) finishing 2016 at all-time highs, with a price/earnings (PE) ratio near 30, means UK stocks are overvalued. Two: UK investors' sky-high global returns came from weak sterling, not organic growth overseas. Both wrongheaded! Understand why, and you'll fathom why stocks should soar in 2017.

Fundamentals were strong last year, in your country and globally, and remain so now. All-time-high UK share prices reflect your growing economy, falling uncertainty post-Brexit vote, bullish political gridlock reducing legislative risk and corporate earnings ready to jump.

Don't let high PEs fool you. They're skewed by the bloodbath in Energy and Materials - nearly one quarter of the MSCI UK by market cap - and one-off legal and regulatory charges in Financials.

With these declines in the past no longer detracting, extant strength in Healthcare, Industrials and elsewhere becomes more visible, and earnings soar. It's just math. PEs will look far more normal.

Think global first

As the world goes, so goes Britain - maybe more, maybe less. But directionally the same, so always think global first.

Sterling wasn't the only thing boosting non-UK stocks last year. America's S&P 500 rose 12% in dollars. The MSCI World gained 7.5% in dollars, or 9% in local currencies (removing the strong dollar's drag on non-US returns when converted).

A perfectly fine year, consistent with fine global economic growth, America's waning political uncertainty and decent earnings growth ex-Energy. The same Energy math normalizing British PEs should boost global earnings.

A down year would surprise forecasters, but the odds favour big and beautifulEven better: Few investors realize this now. Wall Streeters' forecasts are barely positive, the most muted since 2010.

The S&P 500's overall blah results since 2014 have warped expectations. Big bull market years - overwhelmingly the norm as expansions mature - are unfathomable to most.

Yet markets regularly surge out of similarly blah periods. US stocks meandered for a year from May 2015 on, one of nine long flat trudges in modern S&P 500 history.

Following the other eight, the average 24-month return was 39%, negative just once (the -2.2% drop following an 825-day point-to-point flat stretch ending in 1935). Six of the eight topped 20%, including a whopping 75% after the 429-day lull in 1953 and 1954.

A down year would also surprise forecasters, but the odds favour big and beautiful. US stocks are usually up big or down in presidents' inaugural years, with most positive years coming when Democrats take power.

Great - as I wrote last month, investors fear Trump the way they usually fear Democrats, so markets probably greet Trump as they do Democrats.

Jekyll or Hyde?

US markets featured mild election-year returns last year, as Trump's anti-trade jawboning and rabble-rousing scared investor-types. Media scrutiny continues from all corners, and he takes office as the most hated new president in modern times. Democrats are sure good Dr Jekyll will morph to chaos-inducing Mr Hyde. Even Republicans, hopeful he's Jekyll, fear Hyde will emerge.

Non-Americans are even more befuddled, battered with editorials likening him to global tyrants. Most likely, Trump does less than imagined, blocked by gridlock and constitutional boundaries, and stocks boom on positive surprise.

Stocks pre-price events like these elections; they come and go, and life goes onEurope, relatively weaker in 2016, should shine this year. After years of debt crises and a GDP double-dip, eurozone sentiment is far behind America and Britain. Optimism finally appeared in the two Uniteds last year, as investors got clarity on Brexit and Trump and realized the world didn't end.

2017 should be Europe's year of falling uncertainty, as elections in France, the Netherlands and Germany settle nerves over ascendant populists.

Regardless of the outcomes, just knowing the results lets investors get over the fear and get on with life. You saw it in Italy last December, when markets jumped after a failed referendum ousted PM Matteo Renzi.

Stocks pre-price widely discussed events like these elections. As they come and go, and life goes on, investors should pay more attention to economic and earnings improvement - and previously unloved eurozone stocks.

Don't get left behind

Don't get left behind as scepticism finally gives way to animal spirits. Own stocks like these:

Quick: What's the biggest Muslim country, gets along great with America, spouts peaceful diversity, is natural resource rich and grows faster than India? Try Indonesia, which I predict gets a pass from any Trumpian targeting. Its second-largest bank and leading microlender is Bank Rakyat Indonesia (BKRKF), which grows fast and is cheap at 12 times my 2017 earnings estimate with a 2.9% dividend yield.

Yelp (YELP), to me, is a culturally weird product, but great as a stock with strong, manageable growth. It plays on self-obsession - sort of like selfies do - by letting people mouth off about local businesses they like and dislike. These days folks love mouthing off - and advertisers love the accompanying eyeballs. Don't expect earnings soon. Expect rising revenue almost breaking even. Still, that's cheap at 3.4 times my 2017 revenue estimate.

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.

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