The medium-term bull market remains intact: take advantage of volatility to buy on setback
Underlying trends are favourable: 1) consumption is supported by declining unemployment rates and rising wages 2) investment spending is poised to accelerate based on the rising trend in new orders 3) trade indicators are continuing to improve (with the oil price playing a non-negligible role) 4) fiscal stimulus in a range of countries adds its contribution to the positive economic outlook. In such an environment, global sales growth should accelerate from last year’s 0% to approximately 5% in 2017. Operational leverage will allow earnings to grow faster than that. Positive reversals in the energy and financial sectors will strengthen the earnings potential, as will share buybacks. All in all, global earnings growth in the region of 10% seems achievable.
Given that the Fed funds rate is heading higher and that 94% of the time when this is the case equities undergo some derating, we consider that their upside in 2017 is closely aligned with the earnings dynamics. Hence, investors should give increased attention to purchase prices and look for buying on market setbacks, with a focus on pro-cyclical assets. Investors should keep in mind that dividends will continue to play a significant part in the total return of their equity investments.