Select your website

X

2018 & Beyond: US Equity Outlook by Marco Pirondini

Perspectives» |

December 13, 2017

US Equity Investment Outlook

Marco Pirondini, Head of Equities, US, discusses his outlook for 2018. 


Q1 / What are the most attractive investment opportunities for 2018?

We believe US large value stocks offer the best risk-reward for three reasons:

 

  • Large value stocks have greater exposure to cyclical growth than growth stocks. We believe the US and global economies are still reflating, which should benefit value stocks over growth stocks

 

  • Tax reform, if passed, will likely cause economic growth to accelerate, benefiting value

 

  • Value has underperformed growth by over 16% in 2017 as investors have favored high growth stocks over value stocks. We think this extreme outperformance of growth over value is unlikely to continue, especially given a positive backdrop for most value sectors and stocks.

 

Within the value universe, we believe financials will perform particularly well as they should benefit from a higher interest rate environment and low levels of credit defaults. In addition, we believe reasonably valued technology stocks are attractive given their exposure to both a strengthening economy and underlying secular growth trends, such as the shift to mobile computing. Conversely, we are less optimistic about interest rate sensitive sectors such as consumer staples, REITs, and utilities.

 

While the enactment of tax reform is far from certain, it would likely provide an additional boost to GDP growth. Lower taxes at both the corporate and individual level will almost certainly result in higher investment and consumer spending, which should benefit stocks that are tied to the economic cycle.

 

Though the environment is positive for investing in US equities in 2018, there are risks to this outlook including the potential for the Fed to become more aggressive in raising interest rates if inflation picks up, uncertainty with respect to public policy, and geopolitics.

 

For this reason, we believe it is a particularly good time to invest in equities with an active management approach which seeks to balance risk and potential return.

Q2 / What are the major changes in your investment outlook for 2018 compared to 2017 and why?

The major difference in investment approach entering 2018 versus 2017 is the focus on owning stocks that should benefit from a reflation of the US economy. While economic growth in 2017 has been solid, it has not been as high as some thought it would have been after the presidential election in 2016. However, the economy has strengthened as the year has progressed: consumer confidence is high, business investment is rising, and productivity has increased. As a result, we believe GDP growth has the potential to surprise to the upside in 2018 even without tax reform and could be the highest level in years if tax reform passes.

2018 and beyond-marco-1

Q3 / What are the main risks to the equity market in 2018 and why?

The main risk to the equity markets is the inability of the US Congress to pass tax reform. If unsuccessful, our outlook for equities in 2018 would change. In addition, we are concerned that interest rates may rise more than excepted due to higher than anticipated inflation. With unemployment at 4.1% in October, the US economy appears to be at or close to full employment, so further growth may cause inflation to accelerate. This could cause the equity markets to decline in anticipation of a potential decline in economic growth in 2019. Other risks include geopolitics and political gridlock in Washington, DC.

Q4 / And what could be the strategy to mitigate risk?

There are two ways to mitigate risk. The first is by focusing on quality. We believe investors should consider focusing on companies that have high returns on capital, sustainable competitive advantages, and low debt levels compared with peers. The other, is through portfolio construction, sizing positions at the security, industry, and sector level to maximize return while limiting risk. As the main risk we see is in acceleration in interest rate, a way to mitigate risk is by keeping a very cautious view on interest rate sensitive sectors.

Important Information

 

Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of December 13, 2017.

 

The views expressed regarding market and economic trends are those of the authors and not necessarily Amundi Pioneer, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Pioneer product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested.

This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service.

 

Date of First Use: December 13, 2017.

Filed Under



Social Sharing

Contributing Authors

Marco Pirondini
Senior Managing Director 
Head of Equities U.S.,
Portfolio Manager

 

Ken Taubes
Executive Vice President,
Chief Investment Officer, US
biography