Investing Themes For 2017

It could be argued that any year following a U.S. Presidential election is a difficult one for investors as the new administration and Congress attempts to enact the platform on which they were elected, and that is certainly true of 2017. Trump’s lack of specificity regarding policy and the fact that many of the things outlined run contrary to traditional Republican policies make it difficult to predict the shape of government policy in the first few months of the year, which means that you will have to be prepared to make changes to your portfolio as actual policies become clear.

That said, from what we already know it is clear that starting out with a portfolio light on bonds and skewed towards certain sectors would be smart.

What to Avoid

The fact that President-elect Trump intends to pursue expansionist policies also poses a threat to those sectors. If Congress does support a large stimulus program it is likely to have an inflationary effect which makes it unlikely that the Fed will have to backtrack on their intentions. That also would have the effect of pushing stock prices up, making that a better place to be invested than bonds or yield based stocks.It is easier in some ways to identify places that you do not want to be going into the New Year than places that you do. We know that the Fed intends to enact three more rate hikes this year, which makes bonds and interest rate sensitive stock sectors places to avoid. Those sectors include things like utilities, telecoms and MLPs, where their dividend yield is an intrinsic part of their value.

Where to be: Health Insurance

One point of agreement among Congressional Republicans and the incoming President is that Obamacare should be repealed. There is no clear indication yet what a replacement healthcare policy and legislation would look like, but based on what has been said so far lifting restrictions on selling across state lines would be a part of it. Combine that with a general intention to scale back regulations on business and the likelihood of less opposition to big mergers, and it looks like health insurance companies could be big winners.

There is, however, one thing to watch out for. Trump has expressed a desire to keep certain parts of Obamacare, such as being able to stay on your parents’ policy until the age of 26 and the ban on discrimination based on pre-existing conditions. If he does that but scraps the individual mandate to buy insurance, then insurers will suffer.

General Insurance

Other insurance companies, whose focus is on life, auto and property insurance should also benefit. Increasing Treasury yields make it easier for companies such as Met Life (MET) and AIG (AIG) to get a decent return on the large amounts that they have to keep safely invested to cover claims. Stocks in the sector have already climbed after the election, but should continue to show steady gains next year.

Manufacturing and Engineering

Bringing back manufacturing jobs to the U.S. was a big part of the Trump platform and has also been embraced by Congressional Republicans. Actually doing that may not be all that easy as it is still cheaper to make most things overseas and automation is at least partly to blame for the decline in the sector. From an investment perspective, that is not really the point. Policies designed to achieve that goal, even if they are not particularly successful, are bound to benefit U.S. manufacturing companies.

From an engineering perspective, while a physical wall along the U.S/Mexico border now looks unlikely, there is a strong possibility of a big push to spend on infrastructure and a desire to do that through the private sector. That makes for a good outlook for domestic focused engineering companies.

Consumer Discretionary & Luxury Retail

Judging by the reaction so far in the market and in business and consumer confidence numbers it looks like we will be going into 2017 with a general air of optimism. Regardless of the actual shape and effectiveness of policy that will benefit the consumer discretionary sector, at least in the short term. In addition, tax cuts, particularly to the top rate, will probably encourage spending on luxury goods, so companies such as Tiffany (TIF) and Coach (COH) could have a good year.

Gold

As mentioned above there is a strong chance that we will shift soon to an inflationary environment, and after nearly a decade when deflation looked more of a threat than inflation that will be a major shift. I don’t think it is likely to get out of control, but after years of Central Banks around the world flooding the system with cash there is always a chance of that happening. Holding some gold as an inflation hedge, therefore, is a sensible precaution for investors.

If we believe the evidence of the market reaction so far since the election, 2017 is shaping up to be a good one for investors. That doesn’t mean that everything will perform well. Starting the year with reduced bond holdings and a focus on the industries that will benefit from what we know about policy intentions will pay off, but above all, it is important to start the year knowing that some changes may have to be made. Flexibility will be the key to investing next year.

Referenced Symbols: MET , AIG , TIF , COH

By Martin Tillier

Source: http://www.nasdaq.com/article/investing-themes-for-2017-cm724411#ixzz4TlL8mPeX