2018 & Beyond: US Equity Outlook by Marco Pirondini

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.