The global equity markets showed surprising resilience to many challenges that accompanied 2016.
Led by fears of a slowdown in China and its impact on the pace of global economic growth in January, the decision of the British people to leave the eurozone in May and surprising choice of Donald Trump presidential.
At the end of the year, 4 US leading indicators traded around record levels and showed double-digit performance this year, European stocks posted minor declines, while Russia and Brazil indices recorded impressive gains in an amendment to the sharp declines in 2015.
In 2017 a number of uncertainties are expected to come, headed:
Leading US stock indexes presented an impressive finish in 2016, when four leading indices: s&p500, DowJones30, Nasdaq100, Russel2000 are trading at a record high, following the “Trump Rally” that began with the election of the Republican candidate for the US presidency in 11/8.
The sharp rise in stock prices is based largely on the expectation that the elected president will support the strengthening of the US companies at the expense of foreign exporters and will lead an expansionary fiscal policy, by lowering the corporate tax and individual tax brackets, which may substantially improve the net income and consumption levels, respectively.
On the other hand, limiting the use of tax havens, transfer some of the production processes of US and global companies and reexamination of free trade agreements, are expected to weigh on the performance of multinational companies.
The US economy supported by positive consumer sentiment, low level of unemployment, steady growth and zero interest rates in order to generate steady growth in corporate earnings and the gradual increase earnings multiples in 6 years.
The surprising victory of Trump is expected to encourage expanding steps that the market was not pricing, and accordingly brought increases in the indices, and cause them to trade in significantly higher profit multipliers than the historical average, the index of the S&P500 trades at 19 – significantly higher than the average of 5 and 10 years (15.1 and 15.8, respectively) .
the Fed declaration at December on forecasts to three rate hikes in 2017, while expecting to expand steps by the president-elect’s forecast may lead to a rise in bond yields and capital losses defensive investors and reinvest some of the money into the stock market.
However, with the support of the improvement in the economy and corporate profits.
Capital market trends indicate that the rise in government bond yields has not yet led to divert money from the defensive, despite higher pricing levels, with an increase of 4.8% in assets beginning of the year, equity-like US ETFs, versus an increase of 2.9% for bond funds.
The US companies took advantage of the low-interest-rate environment and the lack of investment alternatives for raising capital, in a significant drop in financing costs and maintaining a moderate cost structure.
In 2017 American companies are expected to generate a growth of approximately 12% in profitability, after the minimal contraction of 0.2% in 2016.
At the same time, the revenue line is expected to grow in 2017 by 6.2%, compared with an expected growth of 2.8% in 2016.
Revised growth forecasts of the US economy for 2017 stands at 2.2%, up from 1.6% in 2016 and supported mostly on hourly wage improvement, stable employment levels and continued improvement in business and consumer sentiment.
Furthermore, the actual implementation of expansionary fiscal measures planned by the incoming president may constitute another step in the improvement in output.
Following by sector, the forecast of raising the FED rate at a faster pace than in 2017, given the consistent improvement in economic indicators and their impact forecast of fiscal measures to expand on inflation, parallel to central banks declaration in Europe and Japan continued expansive monetary policy, the strong dollar is expected to continue to weigh on the profits of multinational corporations , with revenues oriented towards exports.
Accordingly, it is preferred to invest in companies whose revenues are based on the US economy, which is the center of the substrate of the president-elect, are less affected by changes in exchange rates, are expected to enjoy an increase in income due to the consumer’s disposable income-tax brackets change, and the reduction of competition that result from limiting wage agreements.
Russel2000 index, which includes such companies, trades at predict PE ratios of 32 in 2016, significantly higher than the average of 10 years (24), but is expected to show an increase in corporate profits at the rate of 52% and 28% at 2016 and 2017, respectively.
Other sectors are expected to continue to enjoy the economic scheme of the president-elect stated, are consumer discretionary companies, will benefit from an increase in the welfare of individual.banks, will benefit from the increase in financial income as a result of the increase in the yield curve and the increase in corporate credit, basic materials, in light of the possibility of the imposition of import duties.
Banks will benefit from the increase in financial income as a result of the increase in the yield curve and the increase in corporate credit, basic materials, in light of the possibility of the imposition of import duties.
In addition, the energy sector is expected to benefit in the long run due to the removal of environmental regulation and support of local activities.
Among the health sector, the impact, on the one hand, will enjoy a reduction of regulatory pressure regarding pharmaceutical prices but on the other hand, may be injured cancellation Patient Protection Act.
The technology sector, due to the lowering of corporate tax on the one hand, but increasing the regulatory control on the other.
In summary, improving the growth forecast of the US economy, low unemployment levels, continued improvement in consumer sentiment and companies and fiscal measures to support the expanding business activity, support the preservation recommendation “outperform” the US stock market.
However, we slightly reduce the weight of exposures in the light of high pricing levels and the impact of export-oriented companies because of the strengthening dollar.
The European stock market introduced this year underperform compared to the leading US indices (index Eurostoxx50 rose by 5.87% against a return of 15.85% in the S&P500) in light of a number of reasons, notably: an increase in uncertainty due to the strengthening of the right-wing parties nationalism in favor of limiting immigration and leaving the European Union, in addition to continuous shuffling levels of inflation, high unemployment and moderate growth in the bloc, and the strengthening of the geopolitical threat as expressed in the terrorist attack in France and Belgium in July and December in Germany, a derivative of the strengthening of the ISIS organization Europe and the decline in the presence of Muslim immigrants in Western Europe.
However, most indices in Western Europe showed a positive return with the support of monetary expansion leads by the ECB Mario Draghi, which includes reducing the federal funds rate to 0% (when interest rates on deposits stands at -0.4%) and plan an aggressive acquisitions of bonds government and corporate bonds currently stands at about 60 billion euros every month, planned to last at least until December 2017.
At this time, the weak euro, completed a devaluation of 6.4% against the US currency from the date of the election, with the support of the Fed faster rate hike expectations in 2017 while continuing the quantitative easing program of the ECB in Europe, supports the earnings of export-oriented companies.
While the program mitigated the impact of negative events that accompanied the continent this year, however, Europe is facing an economic and political test next year, which could cause volatility in the markets, with elections expected in the Netherlands, France, and Germany.
The strengthening of the extreme right-wing parties led by Gert Wilders in Holland and-Marie Le Pen in France required to lead a referendum for continued euro zone states if they choose raises the level of concern about the future of the European Union in its present format.
Meanwhile, in Germany, the current chancellor, and leader of the Democratic Party, Angela Merkel, still receives support rates of 57%, a recent survey conducted by Infratest Dimap, but recent terrorist attacks have increased the level of support for the Nationalist Party AfD.
European companies are expected to show growth of approximately 12.5% profitability in 2017 (compared with a contraction of 2.2% in 2016), while they supported by efficiency plans, lower financing costs, improving the state of the European consumers and the effect of the euro depreciation on the profits of exporters.
The Eurostoxx50 index is now trading at predict PE ratios for the next 12 months of 17, higher than the historical average, but lower than MSCI World (18.1) and the S&P500 (18.8).
Japan recorded a gradual recovery in recent years thanks to the policy of ‘three arrows’ lead by the Prime Minister, including aggressively monetary and fiscal expansion in order to extract the country from the “two lost decades” crisis, accompanied by the Japan since the early 90s and is characterized by growth and inflation at zero.
At the monetary sphere led a bond purchasing program and a negative interest rate environment, while the government focuses on proper employment in the elderly population and raising the proportion of private consumption.
The negative interest rate environment resulted in a weakening of the yen to its lowest level since February and has helped the country’s leading index, the Nikkei 225, to complete an increase of 26% since August.
About 46.7% of revenues come from foreign markets index, so that the continued weakening of the local currency supports their profits and share prices accordingly.
Index of Japanese stocks now trading at a multiple of 19.5 on earnings forecast for the next 12 months, higher than those in Europe and the US, but plays a considerable potential in light of expectations of further growth in profits and a strong commitment by the central bank to improve consumer marginal consumption.
In the background, the country’s economy is expected to continue to enjoy a strong labor market, modern and efficient industrial and technology companies.
MSCI Emerging Markets index showed an excess return compared with the MSCI World Stock Index in the past year (8.5% vs. 5.3%), while high variation between countries: stock indexes in Russia and Brazil recorded impressive double-digit high in light of the increase in commodity prices, the local currency recovery, stabilization and growth data geopolitical environment, equity markets posted negative returns in China in light of the concerns of the country’s ability to cope with demographic changes, which led to a slowdown in the rapid growth that characterized them until now.
President-elect’s promise to the United States, Donald Trump, impose restrictions on world trade, while it reconsiders the NAFTA agreement, in order to strengthen the US economy, may significantly affect the income of exporters in emerging markets, especially China and Mexico.
On the one hand, the trend of improvement in the continued growth and expanding measures by governments and central banks in light of moderating inflation levels, support continued improvement in the economy of the countries, improving in consumer position and corporate earnings, given the consumption-based economy.
However, high inflation data, expected decrease in capital flows following the Fed’s tight policy in 2017, imposing restrictions on trade with the United States, a high dependence on commodity prices which are characterized by high volatility and extensive uncertainty, parallel to low level of transparency and low performance in decreasing market environment, are not good for this market.