Marco Pirondini is Head of Equities, US at Pioneer Investments.
A Constructive Outlook for 2017
We are constructive on the outlook for the global economy going into 2017, given the renewed attention on fiscal policies that will work alongside continued supportive monetary policies. We have seen this in Japan, now in the US and probably in the UK. We think that all of this should support global growth and more importantly, earnings. Further support is coming from rebounding commodity prices, and we think that the market next year may appreciate at least in line with earnings growth.
Market Drivers and Risks
The major drivers of stock price performance are the cost of capital and earnings growth. Given increasing inflationary pressures, the cost of capital is rising. We believe this will be more than offset, however, by a resumption of earnings growth after seven quarters of poor earnings performance. This should support higher stock prices in the coming year.
That said, the world is a dangerous place these days, and there are a lot of risk factors to consider. I think it will be important to understand the political dynamics in Europe. 2017 is likely to be a challenging year for Europe given Brexit, the outcome of the Italian referendum and capital constraints in the banking sector, among other factors. In addition, while we believe the Trump Administration policies will generally be positive for the US economy, there are significant policy risks – such as trade restrictions – that will be important to monitor as well. Finally, the war in Syria and the resulting immigration issues in Europe are likely to continue to pose both economic and geopolitical challenges in the coming year as well.
Markets and Sectors to Watch
We have favored the United States for a long time, but we now see some opportunities outside the United States. We still like the US, but we also believe emerging markets selectively may outperform. From a sector perspective, we believe financials stocks, especially in the US and in some emerging markets, should perform well. Given our belief that economic growth will accelerate, we favor cyclical sectors such as industrials and technology as well. We also like the health care sector, which has performed poorly this year, but is likely to recover in 2017 given attractive valuations and growth prospects.
Focus on Countries with Stimulative Policies
We think investors should be focused on countries where economic policies, and in particular fiscal policies, are stimulative. With this in mind, we like the US, Japan, the UK and some emerging markets that are more dependent on internal consumption rather than on global trade or commodities.