Global GDP growth > 3%. The world economy enters 2017 with positive and broad momentum. This year could be the first “late-cycle” growth synchronization between developed (DMs) and emerging market (EMs) economies since 2006. We expect the end of growth-projection downgrades in 2017.
EM growth: steady recovery. Contrary to past US$-rebound episodes, inflation is falling across EMs while commodity prices are firming. This backdrop should allow EM central banks to maintain monetary stimuli while boosting EMs’ dollar reserves needed to service US$-denominated liabilities.
US economy: no blockbuster growth. While forward-looking indicators such as the bond-yield curve, the ECRI index and railroad carload activity point to growth re-acceleration, the lagged impact of the US$ appreciation should limit growth to around 3% in 2017. Fiscal reflation appears to be a 2018 story.
Canadian economy: stuck in a rut. While the negative impact from the energy sector downturn is fading and fiscal stimulus from government is expected, headwinds from mortgage borrowing curbs, over-levered households and chronic trade deficits should constrain GDP growth below 2%.
CDN$: year-end target at 70 cents. We forecast a decoupling with oil prices. The triple-A rating on Canada’s debt is safe but de-rating risk could mount after the Federal Budget in March. We expect the DXY and the EUR$ to trade sideways. At 16% below PPP, the EUR$ should hold above parity.
Strategy: MW stocks, UW bonds: Equities have become a riskier asset class as a tug-of-war operates between liquidity and EPS growth. However, pullbacks should be bought. Valuation should overshoot before the next recession. US 10-year bond yields are capped ~2.5% due to the JGBs’ pin at 0%.
SP 500 year-end target at 2,325. We are using a terminal equity-risk premium (ERP) of 3%, a terminal range on US 10-year Treasury bond yield of 2.25-3%, and consensus 2017 EPS at $130. We believe bond yields bite on valuation above 2.75%. Potential end-of-cycle target at ~2,500.
S&P/TSX year-end target at 16,300. Using consensus 2017 EPS at $930 in our ERP methodology provides a 16,600 target. On a P/BV basis, since the 1990s the S&P/TSX has never peaked below 2x book value or ~16,000. We are blending the two targets. Potential end-of-cycle target at ~17,000.
Strategy: cyclicals > defensives. Three investment themes through 2017 are: 1) EM growth acceleration, 2) US value > growth stocks, and 3) the third Fed hike. Despite volatile sector shifts, our three themes argue for sticking with resource and economy-sensitive sectors through 2017.
Resources (OW): Benefit from rising EM LEIs. Average cycle lasts 23 months and outperforms the market by 43%. We are halfway through. OW integrateds, E&Ps, E&Ss, base metals and lumbers.
Contrarian themes 2017. 2016 was an excellent year with golds (+41%), US CEMs (+30%) and US Telcos (+33%) beating indexes. Since inception, our contrarian calls have returned 22% on average. For 2017, Canadian oilfield services, the aerospace group and US REITs are our contrarian picks.
For 2017, Canadian oilfield services, the aerospace group and US REITs are our contrarian picks.For the full report please contact me directly.
Martin Roberge, M.Sc, CFA | Analyst | Canaccord Genuity Corp. (Canada) | firstname.lastname@example.org | 1.514.844.3734
Guillaume Arseneau | Associate | Canaccord Genuity Corp. (Canada) | email@example.com | 514.844.3138