3. In Brief
4. The Economy – The U.S
5. The Economy – Global
5. Developed Europe
5. The Nordic Region
6. Important Dates
7. Domestic Equities
14. Fixed Income
15. Alternative Investments (AI)
With global political volatility spilling over into the financial markets in 2016, the year ended on a positive note, with the S&P up 9.84%, however, a more extensive calculation with dividends, reveals the true 2016 S&P 500 return to be closer to 12.25%. The 2017 Year Ahead, a Global Investment Outlook provides our insight for the year ahead, across the global landscape. Essentially, our best ideas for 2017, across sector, geographical location, and asset class.
Over the next 12 months, we expect domestic equities reach double digit growth, in select sectors:
- Stand to benefit from President Trump’s Wall Street friendly policies and the prospect of lower corporate taxes. Although Financials gained 22.8% in 2016, with rising interest rates and strong valuations, the financial sector looks to benefit in 2017.
- With steps, already underway to repeal and replace Obama Care (ACA), we believe the aggressive terminology, translates to “refine”. Given the loss of tax revenue generated by the Federal Government, and 20 million Americans would lose healthcare coverage, refining ACA is the most likely outcome.
- With technological innovation impeding on all other areas of business, this looks to be a good year for technology. Although there is concern over Trump’s immigration policies, repatriation should offset these concerns.
- With the Trump Administration’s promise of expansionary fiscal policy, we expect Industrials to see a boost. With the prospect of a $1 trillion investment in infrastructure over the next decade, lower corporate taxes boosting business investment, and increased military spending, the near future looks good for Industrials.
With regards to geographical allocation, our consensus is on the United States, as domestic equities stand to gain for a number of factors. We also recommend Japanese equities on a currency hedged strategy, given the dollar strengthening position against the Yen. Europe (ex U.K) is also attractive, given steady growth, however, we recommend avoiding the UK, and focusing on the Nordic Region and Developed Europe. The strengthening dollar should add value to the Travel & Tourism sector.
We continue to recommend investors consider high-yield over government and municipal fixed income, and allocate more towards equities and alternative investments (AI). With low commodities prices already rising in in 2017, and real estate feeling the effects of rising interest rates, we recommend clients looking to allocate towards AI should be selective in terms of industry, and geographical location.
The Economy – The U.S.
Eight years into economic expansion, the bull market has continued with steady trajectory, with few signs of slowing down. The U.S. markets have shown resilience, as equities are fairly valued, and the Fed has had to take little intervention. The Trump victory, although a shock to the world had little effect on global markets, mainly due to the lack of transparency from the Trump administration, regarding fiscal and trade policies, as well as indications of financial deregulation, and the repeal of the Affordable Care Act.
As the state of the U.S Economy continues to show improvement over all sectors, it is inevitable we will see signs of inflation. Inflation supported by an expanding economy, supported by higher wages, lower gas prices, and relatively low mortgage rates. In order to keep inflation steady, we expect the Fed to raise interest rates only once in 2017, and twice in 2018, stepping away from the broad popular consensus of twice in 2017, and two to three times in 2018.
Actions taken by the Fed, in terms of increases in the base interest rate, will negatively affect trade. As our interest rates increase, foreign investors move assets to the United States, strengthening the greenback. As the dollar increases in value, against foreign currencies, U.S. goods and services become more expensive for foreign buyers. All while imports become more affordable to the U.S. consumer.
President Trumps policies are likely to be expansionary, as he leans towards protectionism, which is inflationary due to tariffs and curtailed immigration. The Fed is willing to accept a slight increase in inflation, as long as they able to maintain close to a 2% target with a level of consistency. Given the relatively low prices on energy, we believe Core Inflation is a better measure of the economy in the New Year.
The Economy - Global
Global economies have shown resilience to 2016’s two surprises: Brexit and the U.S. election. At Samra Wealth Management we favor the following areas for geographical allocation:
- Developed Europe
- Technological advancements, and friendly immigration policies are leading to developed Europe to follow the United State in becoming a hub for entrepreneurial start-ups. Cities such as Berlin, Dublin and London are just a few of the cities highlighted by the World Economic Forum, as the best cities for start-ups.
- Nordic Region
- With an increased emphasis on renewable energy, the happiness of their citizens, entrepreneurial friendly policies and the best education systems in the world, the investment for the Nordic Region looks to pay off in 2017 and beyond. The Nord’s have effectively driven down operating costs, from utilizing outsourcing and investing in cheaper and sustainable energy infrastructure. They’ve started a war for talent, where top college graduates are investing their futures at home, as opposed to immigrating towards the West.
- Behind the U.S. Japan is our favored market, given the Bank of Japan’s continued stimulus and resilience to both Brexit and the U.S. Election, with low inflation these stimulus measures by the BOJ look to provide a jolt to the Japanese equity markets. A weakening Yen against the dollar, causes concerns of foreign-yield risk, and we therefore recommend any investments in the Japanese markets be made on a currency hedged basis.
As China’s growth stabilizes, investors’ worries diminish, however we stand cautious of the Chinese market, given the PBOC’s vocal intent of devaluing the RMB, and the Private debt-to-gross domestic product, which has climbed to 200%. Investors should look at small and mid-cap Chinese firms, and firms that are under-valued. Trades in the Chinese market could prove detrimental to portfolios investing without an adequate currency hedge. China could also benefit from President Trump’s trade war with Mexico.
Singapore and Hong-Kong will benefit from the global hunt for yield, however, investors of equities should be cautious, and again we recommend any investment outside of the United States to be conducted on a currency hedged basis.
With the recent demonetization in India, Indian equities look to outperform emerging markets. However, given Narendra Modi’s ability to strengthen the Indian economy by making India an easier place to do business, and inviting in direct foreign investment. India has something that is attractive to many foreign corporations: a young population and a rapidly growing educated middle-class. Organizations from the National Basketball Association (NBA), Disney, Coca-Cola and Microsoft have poured billions of dollars into the Indian economy, attempting to capture additional market share, with a population that overshadows that of developed nations. Since this strategy will likely support the Indian Rupee, any investments made in the Indian equity markets should be made with a non-hedged strategy.
There is no doubt 2016 has been a rollercoaster year, a year where uncertainty has plagued the political and economic environment. Although the quantifiable data and statistics from government departments (The Department of labor; The Department of Commerce; The Federal Reserve) have shown steady improvements: it is now apparent that these statistics are not uniform across our economy. A decrease in the unemployment rate to 4.6% the lowest jobless rate since August 2007, has not decreased uniformly across the United States, with rust belt states such as West Virginia and Pennsylvania trailing the nation with unemployment rates of 6.0% and 5.7% respectively. The Bureau of Economic Analysis also indicates West Virginia and Pennsylvania per capita income has grown at 2.5% and 3.8%, far below the national rate of 4.5%. A Trump victory, however, has boosted consumer confidence, in these states, as the index climbed to 113.7 in December, a 15-year high. Given Donald Trumps ‘Wall St. friendly demeanor’, the year ahead looks promising to investors of domestic equities,
Over the next 12 months, we expect domestic equities reach double digit growth, in select sectors:
“In the days following the U.S election, Financials were the best-performing sector”. With financials being the key beneficiary to rising interest rates, banks and insurance companies should expect a good year ahead. With President Trump Wall St., friendly demeanor, and cabinet make-up, there will be little to hold back financials this year. However, not all financials will profit: with the advent of the Department of Labor’s Fiduciary Rule, set to come into play this April. Insurance companies focusing on variable annuities will feel the pressure of losing out on sales opportunities, abiding by the new legislation.
In early 2000, the dot-com bubble burst, leaving investors who opted for annualized returns of over 25% from 1995 to 2000, discouraged and ruined. It is no surprise the media is echoing similar concerns, as the market continues to reach new highs. At Samra Wealth Management, we believe there are reasons for concern and volatility throughout the remainder of the year, however, we do not expect a significant decline in US market valuation, with consideration to the technology sector. Unlike the dot-com bubble of 2000, a time when great ideas just didn’t make sense in the real world, in 2016 these concepts are adding value through convenience. At SWM, we have compiled a list of our top ideas based on the potential growth outlook in the industry as it relates to the market capitalization in each area.
Artificial Intelligence (AI)
“Artificial Intelligence (AI) is the new electricity” according to Tony Kim, a portfolio Manager with BlackRock’s Global Opportunities Group. The ability to convert massive amounts of complex data to useful information can be used in every other business sector, from banking to healthcare. Research shows AI to the best bet for future investment, as AI is on track to reach a market of $70 billion by 2020. Investors should be cautious, as many ideas within AI will become obsolete, or replicated by larger firms that have the capabilities. The Caveat here is, although AI could eliminate up to 47% of total US employment, it is important to remember a decline in the labor force would lead to less disposable income in the economy. Expect domestic firms to use India and China as test markets due to their large populations.
According to PwC; in 2015 the number of reported security incidents rose 48%, to approximately 118,000 per day, while organizations reporting financial losses in excess of $20m rose 92%. The increased attacks are striking both corporate balance sheets, as well as brand image. As we head towards a cashless society, with global internet penetration at an all-time high, and mobile platform increasing in popularity, it is our opinion at Samra Wealth Management, corporations of all sizes will dedicate more resources to battle cyber-attacks. The US government has taken a proactive role in committing to fill an additional 3,500 cyber security positions by January 2017.
Virtual Reality/Augmented Reality (VR/AR)
Augmented Reality, which provides a user the ability to superimpose computer-generated images and data, on the user’s real world view, has seen recent advancements, with regards to optics and 3D mapping abilities. These innovations are creating real world applications, and we expect to see further usage in the following areas:
- Aviation & Aeronautics
- Military & Law Enforcement
- Education & Training
Organizations able to capitalize on AR technology are already experiencing brand recognition, and increased market capitalization. The Pokemon Go craze is one example of an early adopter, the technology has helped Nintendo reawaken their public image, as they double their market capitalization to $42B in just seven trading sessions since the mobile game was launched.
3D printing has the capacity to cross into every other sector, and we are already seeing the benefits within areas of: technology, communications, manufacturing and robotics. We expect real world implementation within the medical and healthcare fields on larger scales as the practices becomes commonly acceptable. Siemens predicts: 3D printing will become 50% cheaper and up to 400% faster in the next five years; expected to surpass $8.3B in global market by 2023. As the automotive industry in the United States heads towards an average fuel consumption mandate of 54.5 miles per gallon, by 2025, 3D printing may be the key. According to Mallikarjun Huralikoppi of NS-3DS a 3D consultant, 3D printers are now equipped to print more than just plastic, and have been used to print materials ranging from carbon fiber to human tissue.
According to PwC; the global market for commercial application for drone technology is estimated to be $2B, and expected to grow exponentially to $127B by 2020. Although drones have started to make an impact outside of military applications, they have not penetrated mainstream markets, due to the lag on legislation overseeing unmanned aerial vehicles. Drones have become relatively inexpensive to make, and we see this trend continuing as demand for drone technology increases. As Amazon, Walmart and other retailers experiment with Drone technology, this could spell bad news for shipping and logistic companies such as FedEx and UPS, as the industry has recently seen an influx of start-ups specializing in shipping and logistics.
Given global internet penetration and mobile internet usage at an all-time high, current trend suggest digital marketing will surpass television over the next 5 years. Our belief is based on the ability to collect data about the consumer, and the quality of this data. With television and print media, there is little feedback to prove the success of the marketing campaign, whereas digital marketing allows the content creator to filter through multiple variables. Digital media comes in many forms, from pop-up advertisements, to social media. It is our opinion companies using social media effectively, by building a network of followers stand to succeed in this area.
Robotics and Automation
According to the International Federation of Robotics; in 2014 robotic sales increased by 29%, with 70% of global robot sales going to 5 countries: China, Japan, United States of America, the Republic of Korea and Germany. The majority of these sales are utilized in the automotive industry, followed closely by the manufacturing of electronic devices. Given the reliability of robotics, and their negative correlation to the cost of human capital; it is in our opinion this move towards automation will continue with similar trajectory.
Mobile Internet Connectivity
Kaushik Basu, World Bank Chief Economist, recently stated “the digital revolution is transforming the world, aiding information flows, and facilitating the rise of developing nations that are able to take advantage of these new opportunities.” A perfect example was recently highlighted by the State Bank of India Chairman, Arundhati Bhatacharya, at the Consulate General of India in New York, as Bhatacharya talked about the impact investment made by SBI in rural villages, providing Wi-Fi access to communities, on a path towards a cashless society. Other examples supporting the growth of this segment are highlighted by increased mobile connectivity amongst all age groups, gaming, and healthcare and wellness monitoring.
Solar technology first discovered over a century ago, has seen widespread availability in residential homes over the last decade, and is currently the fastest growing segment within the energy sector. With companies from Walmart to Apple making commitments to go green, at SWM we believe companies specializing in solar technology for commercial and residential application should continue to grow at a faster pace than seen over the last decade. The rationale behind this growth is focused in 2 main areas: brand recognition as a socially responsible business, and the decreasing cost of solar technology. As we continue to see technological advancements in this area, and implementation around the globe, we expect to see solar technology in areas we have not seen before, powering personal computers and electronics, to transparent solar technology placed over windows and roads, as are currently being used in the Netherlands. When power storage solutions such as home batteries have the ability to store power, we expect to see a further increase in the area of solar technology.
Autonomous Vehicles (AV)
According to Mckinsey & Company; “it is unlikely that any on-road vehicles will feature fully autonomous drive technology in the short term,” however, automotive manufacturers are currently investing in driver assisted technology. Tesla (TSLA) has recently made autonomous driving a reality, and this trend is expected to continue as competitors enter the market, pushing the price level down.
CCS Insight reports the global wearable market will reach $14B this year, and is further expected to grow to $34B by 2020. Wearables represent a segment connecting the user to health and wellness, media, retail and jewelry via technology. With Virtual Reality and gaming joining the wearables segment, this segment continues to look attractive. Once commercial applications have been integrated, and become mainstream in terms of training and simulation, we believe the wearables market will surpass previous expectations.
President Trump has indicated a repeal of the Affordable Care Act, we believe this is highly unlikely, and the Healthcare Sector will continue to see double digit growth in 2017. Although we do expect to see some changes to the Affordable Care Act, these changes would assist the Healthcare Sector. The most favorable of these prospective changes would be some form of Health Savings Account, allowing individuals to dedicate tax deferred income specifically towards their healthcare needs. Repealing the Affordable Care Act would have a detrimental effect on the economy, at risk would be (1) 20 million Americans would lose healthcare coverage, as a result the insurance companies would lose 20 million customers; (2) Insurance companies would lose Federal Subsidies, they have calculated into their projections, given the large capital investments they made with the advent of the Affordable Care Act; (3) The Government would lose the $13.9 Billion in Affordable Care Act tax income.
With an aging population, and increased global wealth and healthcare awareness, the healthcare sector looks to be a good investment over 2017. Pharmaceutical pricing could come under scrutiny with the Trump Administration looking to make improvements to the Affordable Care Act.
As technology impacts the world of medicine, and emergency response, we have witnessed some innovative ideas come to market. Most recently, Rata Tata Chairman of the Tata Sons invested into the startup MUrgency Inc (pronounced Emergency). A mobile platform in the form of an app that makes emergency response available with one tap on a mobile phone, in under 9 minutes in urban areas. Although the one tap costs 350 INR, which converts to approximately $5.13 USD, the strategy is focused on building market share, and popularity.
With President Trump’s promise of expansionary fiscal policy, we expect Industrials to see a boost. With the prospect of a $1 trillion investment in infrastructure over the next decade, lower corporate taxes boosting business investment, and increased military spending, the near future looks good for Industrials. However, the Trump administration may be able to affect the industrial sector, however, it is unlikely they will be able to bring back any manufacturing jobs. Since the Presidential Election, many CEO’s have come forward and talked about keeping jobs in the United States, and the creation of new domestic jobs. However, these CEO’s seem to only tell part of the story. Recently Ginni Rometty, CEO of IBM, announced the creation of 25,000 new jobs, in the United States. Unfortunately, there was no mention of the recent layoffs at IBM. A similar story with Ford, as they cancelled plans for a Mexico plant. President Trump failed to acknowledge that Ford had already planned to bring 700 new jobs to the United States, prior to him winning the Presidential Election.
The real story with manufacturing is, President Trump has little control over jobs that have been lost in manufacturing over the last two decades. These jobs have been lost due to three reasons: (1) Automation, advances in technology and robotics has made it more cost effective for human capital to be replaced by robots; (2) Offshoring, these jobs have gone to countries where labor is far cheaper than it is in the United States. Although these jobs could come back, it is unlikely that consumers would be willing to pay the additional cost incurred by domestic labor; (3) A combination of Automation and Offshoring: although it may be cheaper to create goods in a country like China where the cost of labor is significantly cheaper than it is here in the United States, we can simply not compete with robotics operations that have been off-shored.
With increases in inflation, we will undoubtedly see increases in key interest rates, as the Fed acts upon its mandate for steady inflation. Increases in interest rates will lead towards investments flowing out of fixed income, and into cash and dividend yielding equities. Higher inflation has caused risk-free income to vanish, causing investors to look elsewhere for yield.
Although the Fed may not move as soon as some speculators may believe, interest rate increases are already priced in ahead of Fed decisions. It is our consensus to move away from treasuries, and invest in TIPS (Treasury Inflation-Protected Securities), high-yield corporate, and select emerging market sovereign debt on a currency hedged basis.
- As long-term rates rise in an improving economy, credit is more attractive than duration. As inflation increases TIPS maybe the closest return to a risk-free investment. Conservative investors should look towards TIPS, as they protect from the eroding effects of inflation.
Price Impact of a 1% Change in interest rates
- High-Yield Corporate Bonds
- Although inflationary increases, and rising interest rates are bad news for High-Yield, growing demand and declines in default rates help the cause of high-yield, making it a good recommendation for the year ahead. Investors of high-yield in 2016 witnessed a 17.5% return. We recommend conservative investors look towards allocating to both high-yield and investment grade corporate bonds.
- Emerging Market Sovereign Debt
- Although EM bonds are threatened by the strengthening greenback, sovereign emerging market debt with attractive valuations purchased with a currency hedged strategy, look to be a good bet for the long-term investor.
A traditional "60/40" allocation to stocks and bonds may no longer be enough to provide you with the returns and diversification needed to achieve your long-term goals. Since 1990, most portfolios carried predominantly equity risk: a 60/40 portfolio moved in the same direction as the S&P 500 Index 99% of the time.
With gold seeing an increase of 8.6% in 2016, we expect gold to see an increase of 7% in 2017, with an average price of $1350. However, President Trumps policies are already causing volatility in the political landscape, we expect to see some investors move out of equities and fixed income into cash and alternatives, potentially pushing gold up to $1400. We however, do not expect to see gold reach new highs.
As silver trades, significantly below its average, 2017 could see a 5% plus year for silver. However, we expect palladium and platinum to see the biggest gains, with expectations of improving demand and rises in automotive sales.
We expect WTI to average $56/bbl while Brent averages $58/bbl. Although global demand is expected to see an increase, technology in mining, and refining will keep up with the additional demand. One Caveat to this rule would President Trump’s promise to strengthen the military. A significant increase in the size of the United States Military would increase demand, and push prices higher, as the United States military is the largest consumer of fossil fuels in the world.
Although global real estate will feel the effects of rising interest rates, with rates hovering at historic lows for so long, we doubt global real estate will affect the commercial market, although individual home buyer’s may feel the pinch. From an investment point of view, we recommend REIT’s in Australia, Hong Kong and Singapore. Domestically, we recommend staying away from the metropolitan areas, and looking for value in residential secondary and tertiary cities, as well as sector specific REIT’s in the healthcare sector.
During times of uncertainty and market volatility, Hedge Funds can help dampen the risk in a portfolio, while providing opportunities for higher return. 2017 looks to be a good year for Hedge Funds, as we expect interest rates to rise, and increases in volatility coming from an out of sync relationship between the White House and the Financial Markets. The HFRI Fund Weighted Composite Index returned 14 percent annually from 1990 to 2006, however, since then, it has returned 3.4% up until 2016. During times of market volatility, the HFRI has allowed investors to profit, while reducing the volatility of their portfolios. The following graph shows how Harvard University is investing in Alternative investments, allocating 14% of $35.7B in 2016 towards Hedge Funds.
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All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor
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