Fundamental All Cap Core

INVESTMENT PHILOSOPHY

We believe that quality companies with a sustainable competitive advantage and cash flow generation bought at the “right price” should outperform. Patience and a long-term investment horizon allows for the compounding of companies’ cash flows.

 

MARKET COMMENTARY

US Equities

Global Intelligence | December 18, 2017

Sandy Sanders, Senior Portfolio Manager, US Equities

Global Intelligence Outlook 2018 - US Equities: The Backdrop Icon

THE BACKDROP

The consumer is fully employed, wages are growing for the first time in many years and household debt levels, particularly mortgage expenses, are at a 10-year low, leaving the consumer balance sheet in fine shape.1

We believe the US economy is in good shape going into 2018, and our conviction is supported by three key pillars:

1.

The consumer is fully employed, wages are growing for the first time in many years and household debt levels, particularly mortgage expenses, are at a 10-year low (see chart), leaving the consumer balance sheet in fine shape.1

2.

Housing starts in the US currently stand at just over one million. The long-term average is 1.5 million and we were at three million in 2007 – compared to the previous peak there is still significant room to grow. We believe this will be driven primarily by the 'Millennial Generation', particularly now they are fully-employed.2

3.

Banks are in a strong position. We came to that conclusion having assessed their balance sheets, evidenced by the fact that they had passed the capital reserve tests for the last six to seven years. It is our belief that they are the healthiest that they've been for a generation.3

Recent developments on Capitol Hill suggest US corporate tax rate is likely to fall in the next 12-24 months. We also believe there could be a reduction in regulation over that period, which would be positive for earnings growth.

Mortgage Debt Service Payments As A Percentage Of Disposable Personal Income

Mortgage Debt Service Payments As A Percentage Of Disposable Personal Income Chart
Source: Federal Reserve Bank of St. Louis, as of September 22, 2017.
Global Intelligence Outlook 2018 - US Equities: The Opportunities For Investors Icon

OPPORTUNITIES FOR INVESTORS

Banks appear well-placed for sustained earnings growth, largely driven by steady demand for loans at higher margins.

Banks appear to be in a sweet spot relative to where we are in the cycle. Interest rates have been low, growth has been low and the economy has been healing. We are now in an environment with a fully-employed consumer with a healthy balance sheet, whose wages are growing, and a housing market that has room to expand. Combined with the likelihood of deregulation, the banking sector appears well-placed for sustained earnings growth, largely driven by steady demand for loans at higher margins.

We also continue to be positive on consumer discretionary given the strong position of the consumer (as outlined earlier). Recent uncertainty caused by healthcare reform has created opportunities in the sector and we are equal weight in healthcare for the first time in many years.

Global Intelligence Outlook 2018 - US Equities: The Risks Icon

RISKS

Valuations are up, but they’re not at levels that significantly concern us. Meanwhile, growth is accelerating and that should keep valuations in check.

Overall, we believe risk levels are relatively muted. We are always looking for where the next bubble might be developing. However, as things stand, we do not see it in consumer spending, consumer debt, housing, or the banking system. Valuations are up, but they’re not at levels that significantly concern us. Meanwhile, growth is accelerating and that should keep valuations in check.

Global Intelligence Outlook 2018 - US Equities: The On Our Radar Icon

ON OUR RADAR

We have yet to see a 4% GDP growth rate so far in this recovery and if that fails to occur it would be the first time since WWII.

The combination of a healthy consumer, potentially lower corporate taxes and reduced regulations creates an environment in which equities can do well. We don’t believe the market is over-valued and think we could see upwards of 10% growth in the S&P 500 in 2018, which is above the consensus view and that of some of our colleagues. Besides, the US economy is accelerating. We have yet to see a 4% GDP growth rate so far in this recovery and if that fails to occur, it would be the first time since WWII.

1 Federal Reserve Bank of St. Louis, October 6, 2017.
2 CNBC: Housing Starts Total 1.127 Million in Sept, vs 1.18 Million Starts Expected, October 18, 2017.
3 Financial Times: Stress Tests Clear Big US Banks for $100bn Payout, June 28, 2017.
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About the Author

2016 Mar Sandy SandersSandy Sanders

Sandy Sanders, Senior Portfolio Manager, US Equities, and Co-Head of the US Core-Value Equity team, based in Boston.

The opinions expressed are those of Manulife Asset Management™ at the time of publication, and are subject to change based on market and other conditions. The information in this article including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Asset Management disclaims any responsibility to update such information. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife Financial, Manulife Asset Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Manulife Asset Management to any person to buy or sell any security and is no indication of trading intent in any fund or account managed by Manulife Asset Management.