Six reasons to remain positive on US & EM equities in the year ahead

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SINGAPORE (Dec 29): Swiss global financial services company UBS is staying positive on US and emerging market (EM) equities in the year ahead.

In its UBS House View for 2017 strategy report, its chief investment office (CIO) highlights several opportunities in these two asset classes which could support their growth well into 2017.

US equities
• Economic growth has room to run, according to the office, especially in the manufacturing and services sectors. This should lead to higher revenue and earnings growth for US corporations. US earnings per share (EPS) is expected to grow by 8% in 2017.

• Monetary policy is forecasted to remain accommodative along with financial conditions for businesses and consumers despite projects of two more rate hikes next year. This is because CIO observes the Fed is “under no pressure to hike rates aggressively” despite the likelihood of borrowing costs being raised.

• Valuations will continue to remain attractive for US stocks as their slightly higher-than-average price-to-earnings (P/E) are justified by low inflation and durable growth. CIO also notes that equity valuations look attractive relative to bonds.

EM equities
• Regional growth rates are anticipated to speed up next year with improved terms of trade, while stable or rising commodity prices should benefit commodity producers. CIO forecasts Brent crude prices to reach US$60/bbl in 2017, and notes that as at 2016, investors are currently under-allocated to EM.

• Global interest rates look set to stay low next year, says CIO, with loose monetary policy to be tightened only gradually. It also expects the US dollar to fade in value as the graduate pace of the US interest rate increases, which would effectively cheapen debt and offer a potential boost to the corporate earnings of EM companies.

• Rising EPS growth in the US, after falling by one-third since 2012, is observed based on climbing EM profits since February and a rebounding revisions ratio from –40%  to a balance of positive and negative revisions. At this stage, UBS believes EM fundamentals are “strong enough to win out against uncertainty”.

Within the US equity market, UBS highlights that stocks are cheap relative to bonds in a historical context. It recommends software sector stocks in the technology industry; pharmaceutical stocks under the healthcare segment; as well as US financials.

The office also predicts Eurozone stocks to outperform the broader MSCI Europe Index in the year ahead. Earnings for EM-exposed Eurozone firms have been picking up, adds UBS, and hence it expects stock prices to begin to reflect this improvement in 2017.