4 Investment Tips for 2017

With the New Year comes new investment themes. The sectors/countries/industries that outperformed in 2016 may not necessarily outperform in 2017. In 2016, the top three performing sectors in the US were Energy (+27.4%), Utilities (+23.5%), and Financials (+22.8%). From a country standpoint, the best performers were Brazil (+38.9%), Canada (+17.5%), and the UK (+14.4%). The US wasn't far behind, however, posting a solid 12% return for the year (S&P 500).

It is rare in the equities markets for the same category or sector to outperform two or more years in a row. Leadership often changes hands, and in some cases the best performing sector or country in one year can be the worst performer the next. That's why it makes sense to diversify across many sectors, industries, and countries when you invest. That way, you can give yourself a better chance at capturing the best performing area of the market and not get too weighed down by the lagging parts. Diversification helps to smooth out returns over time.

Now, onto the investment tips. The first tip is for investors to have as much equity exposure as they're comfortable with (from a risk tolerance perspective) and in accordance with your investment objectives. If you're young, have appetite for risk, and are looking for long-term growth, I'd recommend taking a full allocation to stocks.

In the equity portion of investor portfolios, I think there are four areas that could stand to outperform:

Investment Tip #1: Overweight to US Financials

There are two tailwinds brewing that could give US Financials (specifically, large banks) a boost. The first is the Trump Administration's promise to roll back regulations on the industry, namely those associated with Dodd-Frank. Looser regulations could inspire banks to take more risk, which could ultimately lead to better earnings. The second tailwind has to do with the yield curve. Longer term bond yields rose in the months following Trump's victory, perhaps as the market started to price-in the possibility of higher inflation in the coming year. As bond yields rose, the yield curve got steeper, and a steeper yield curve is good for banks. The steeper the yield curve, the higher the net interest margins for banks.

Investment Tip #2: Exposure to Europe

For the first time since 2008, the Euro-area grew at a faster pace than the US. Brexit was a hit to the European Union, but the effects aren't likely to be felt until 2019 or even later. The other factor to watch are elections in Germany, the Netherlands, France, and Italy - all of which will inform us whether the populist movement really has legs. Populist victories would mean a threat to the economic order of the European Union, which could rattle markets. My guess: the anti-euro parties won't gain big victories and the uncertainty around the viability of the European Union will fade. Markets should rally on that news and the area should continue to expand. 

Investment Tip #3: Overweight to Industrials

The Trump Administration has promised to spend significant money to rebuild roads, airports, and potentially a wall bordering Mexico. If his plans go through or some version of them passes, that could mean some fresh activity for Industrials companies. 

Investment Tip #4: Overweight to US Midcap Companies

Trump's "America First" policies may end up resulting in some trade barriers and tariffs against foreign goods entering the US. Those policies, and a stronger dollar, could lead domestic companies to outperform multinationals. You tend to find the pure domestic companies in the small- to mid-cap space, and I'd favor Midcap over small-cap. Small caps tend to outperform early in economic cycles, and we're already entering the eighth year of this one. 

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