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US ECONOMY WITH STRONGER THAN EXPECTED GROWTH

09.03.2017 - 11:24
Despite the uncertainties associated with a Trump presidency, our view on the US stock market remains positive. Macro- and microeconomic factors as well as the technical situation and investor sentiment make us feel optimistic that the current bull market will continue in 2017. We expect the US economy to grow stronger than anticipated by markets thanks to economic policy changes including corporate tax reforms. Corporate earnings will replace the Federal Reserve as catalyst of stock prices as markets transition from an interest rate driven bull market to an earnings driven bull market. Among various US industries, some will benefit more than others and some may be harmed by policy changes. Beneficiaries should be the financial, energy and industrial sector, while health care could show some relative weakness.

After the elections in November, Donald Trump took office as the 45th president of the United States on January 20. In accordance with Paul Ryan, speaker of the House of Representatives, Trump announced a detailed program on “how to make America great again”. Even though his unconventional and somewhat erratic rhetoric and behaviour entail significant political and economic risks, we expect the positive influences of the policy regime shift on economic growth to outweigh concerns. Trade policies pose one of the highest risks and we do expect some modifications but broad structural trade barriers are highly unlikely since they would involve enactment by Congress.

GDP Outlook: Massive Growth in 2018

Markets are currently expecting a US GDP growth of 2.3 percent for 2017, we expect 2.4 percent growth. Whereas some of Trump’s policy changes will probably already be visible in September, we expect momentum building in 2018 where our 2.9 percent GDP forecast is significantly ahead of market consensus with 2.3 percent. Our assessment is based on expected enactment of sweeping US government corporate tax reform, increases in infrastructure and defence spending as well as modest cuts to individual income taxes. The GDP growth should reflect positively on company earnings and ultimately on stock markets, especially when it is stronger than expected.

Improved Fundamentals

Despite the long lasting bull market, US stocks remain relatively fairly priced. Trailing P/E ratios which reflect earnings of the past four quarters, as well as forward P/E ratios are slightly above historic averages. However, considering current interest levels and lack of investment alternatives, these figures are still acceptable, especially with our anticipated earnings growth of 8 to 10 percent. We currently see a transition from an interest driven bull market to an earnings driven bull market. With higher earnings than price increases, P/E ratios should adjust to more favourable levels.

Time for Active Management

Implications of policy changes will differ across various US industries. As in 2016, we prefer value stocks over growth stocks and within the value environment cyclical stocks over defensive stocks. Cyclical value stocks include the financial, industrial and energy sector. The US financial industry currently benefits from Trump’s policy and will continue to do so from higher interest rates which are expected to accompany the stronger economy, along with higher volumes and improved credit quality. We see relative weakness for the health care sector, especially for pharmaceuticals, whose high profit margins are an easy target for government policymakers.

By looking at the correlations of the individual sectors we have seen some massive rotation since the outcome of the presidential elections in November and highly recommend the need for active management. Our flagship fund, the Berenberg Systematic Approach – US STOCKPICKER Fund, currently shows a cyclical value bias and benefitted significantly from the recent sector shifts.

Till Christian Budelmann is managing director and head of fund management at Berenberg Bank (Switzerland) AG. Since 2004, he has managed the systematic stock selection activities including the Berenberg Systematic Approach – US STOCKPICKER Fund. Throughout the group, assets in excess of USD 1 bn are managed by using this approach. Mr Budelmann also represents US equities in the group’s investment committee.  

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