Top 10 Investment Themes for 201801-05-2018 |
Let me start by saying that we, at Hennion & Walsh, wish everyone a happy and healthy New Year. Secondly, as we turn the page from 2017 to 2018, below are 10 investment themes that we expect to be influencers of market performance, and therefore in the mindsets of investors, in the New Year.
1. Fundamentals and Earnings – while much of this secular bull market cycle, which dates back to March of 2009, has taken place on the backs of quantitative easing and other economic stimulus measures from central banks around the world, we believe that future stock growth potential will now largely be predicated on fundamentals, including, but not limited to, earnings growth. Continued economic growth in the 3% range within the U.S., along with a more accommodative U.S. corporate tax code, should help with the expansion of earnings for well-positioned and well-run companies with sound balance sheets. In addition, higher earnings, assisted by lower tax rates, should make valuations appear more attractive given that earnings are the denominator of one of the more common measures of valuation in the market (i.e. the Price/Earnings Ratio (P/E)).
2. Value Comeback – growth outperformed value in 2017 across all market capitalizations and rather significantly in the U.S. Large Cap asset class. We believe that this type of market leadership is likely to change along the course of 2018 for reasons beyond just a simple “reversion to the mean.” Value-oriented stocks typically have high relative dividend yields, low price-to-book ratios and/or low price-to-earnings ratios, and tend to trade at a lower price relative to their fundamentals and are thus considered undervalued. Despite certain more attractive P/E ratios and rising interest rates that are anticipated in 2018, we believe that value-oriented investment strategies stand to benefit from their relative valuations and income potential, in addition to any increases in market volatility in the New Year.
3. Fed’s 1-2 Punch of Rate Hikes and Balance Sheet Reductions – the Federal Reserve (Fed) indicated after their December 2017 meeting that they believed that three additional rate hikes would likely be warranted in 2018. Several Wall Street strategists are forecasting four potential hikes in the New Year. We tend to think that three rate increases of 25 Bp (i.e. 0.25%) each in 2018 is more likely along with an increased pace of balance sheet reductions, remembering that reductions of U.S. Treasuries from the Fed’s balance sheet can also impact interest rates and serve as an additional means of tightening. If this 3 rate hike forecast holds true, the Federal Funds Target Rate would end the year of 2018 within the range of 2.00%-2.25%. With respect to the Fed, while it is expected that new Fed Chair Jerome Powell will likely be similar to Janet Yellen in terms of stance and approach, it will be interesting to see the stances and approaches of the individuals that are appointed to fill the other open Fed positions (including Vice Chair) in 2018.
4. M&A Activity – the repatriation provisions of the new tax act will bring more cash back onto the balance sheets of certain U.S. multi-national companies. One potential use of this excess cash would be mergers and acquisitions (M&A) and potential M&A targets may be in the areas of technology and biotechnology considering that technology and healthcare account for 85% of total S&P 500 untaxed cash overseas according to an Emily Stewart article on TheStreet.com entitled, “20 Companies Goldman Sachs Thinks Will Be Huge Winners from Trump’s Big Tax Plan.” With respect to biotechnology, we believe that some larger pharmaceutical companies benefiting from repatriation may consider acquiring an attractive biotech company to help with recent or upcoming drug patent expirations and the lack of drugs in their own pipelines to replace any resulting reductions of revenue.
5. Smaller Cap Resurgence – this is another area where we anticipate a change in market leadership in 2018. Large Cap was the winner of the market capitalization race in 2017, with Mid-Cap coming in second place and Small Cap coming in a still respectable double-digit returning third place. Looking forward, while we still believe that Large Caps will provide attractive total returns in 2018, we also contend that companies of smaller capitalizations will likely outperform on a relative basis as they stand to benefit more from the new tax legislation and are more attractively valued on a Forward P/E basis.
6. International Equities Leadership – this represents an area where we expect continued market leadership in the New Year. Subscribing to the notion that “a rising tide lifts all ships”, we believe that continued economic growth in developed markets, such as the U.S. and Europe, can help propel growth in other developed market countries, as well as certain emerging market and frontier market economies. In addition, despite their outperformance in 2017, international developed, emerging and frontier markets are still more attractively valued on a current P/E and Forward P/E basis when compared to U.S. stocks. Over the course of 2017, it would appear that investors have taken notice of the rotation from U.S. stocks to international stocks by adding over $64 billion into world equity funds through the end of October while domestic equity funds experienced outflows of over $169 billion over this same timeframe. We anticipate this rotational shift picking up pace in 2018.
7. Infrastructure Spending – we believe that infrastructure spending will likely be the next major centerpiece of the Trump administration’s agenda in 2018 now that tax bill has been passed. If a spending bill does come to fruition in the New Year, certain asset classes such as municipal bonds and equities, and within equities, certain sectors such as energy, materials and industrials, stand to benefit.
8. American Energy Independence and Expansion – an ease in regulations, an increase in infrastructure spending, a renewed interest in American energy independence and overall energy sector supply and demand factors could help fuel (pun intended) certain energy-oriented investment strategies in 2018. While OPEC restrictions on crude oil output will continue to play a pivotal role in the price of oil and the profitability of certain companies in the energy sector affected by oil prices, it would be foolish to ignore the global interest in alternative energy sources when looking for opportunities in the energy sector. One such source of alternative energy is natural gas, a cleaner burning fossil fuel, for which the United States has a relatively abundant supply that is being further enhanced through innovative hydraulic fracturing (a.k.a. “fracking”) techniques. In addition, through the liquefaction of natural gas, liquefied natural gas (“LNG”) can now be exported overseas to meet growing worldwide demand.
9. E-Commerce – Cyber Monday 2017 represented the single largest day of online sales in U.S. history with approx. $6.6 billion attributed to sales transacted online that day alone. Record cyber sales continued through the entire holiday shopping season as well in 2017. Despite the heightened activity in the E-Commerce ecosystem, online sales somewhat surprisingly only account for 9.1% of total retail sales as of Q3 2017 according to Federal Reserve Bank of St. Louis Economic Data. However, to put this in perspective, online sales have grown from representing just 4.6% of retail sales in Q3 2010 and are expected to grow to represent approximately 14% of total U.S. retail sales and over 15% of total global retail sales by 2021 according to Statista. We would not be surprised to see these expectations surpassed with online sales climbing at an even faster pace across segments and geographies in 2018.
10. Technology Revolution – the later stages of 2017 were marked by a great deal of discussion and debate around Bitcoin and other cryptocurrencies. While we will not look to enter this debate through this outlook, we do recognize that the revolutionary, underlying technology that Bitcoin utilizes appears to be a game changer. This technology is referred to as “blockchain”, which is essentially a secure, decentralized and distributed digital ledger that is used to record transactions across many computers and potentially applicable to many different industries. However, blockchain is not the only technology that is likely to disrupt the way that we interact and the way that commerce takes place in 2018. Additional innovations in areas such as cybersecurity, artificial intelligence (“AI”), robotics and other forms of financial technology (“FinTech”) will be ones that we will be paying very close attention to in the New Year.
Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above. This article is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.