2019 Outlook: US Value Equities

Energy tops our list of 2019 opportunities

Dec 18, 2018 | Kevin Holt

Key takeaways

  • Equity markets have been negatively impacted by global trade war concerns, and investors are also worried about the prospects of slowing economic growth given tighter monetary conditions.
  • In particular, opportunities exist in select cyclical sectors as many are discounting a sizable economic slowdown commensurate with a recession.
  • In our view, historically low volatility sectors are expensive, and in some cases structurally challenged versus history.

Equity markets have moved meaningfully higher with little disruption since the presidential election in 2016. Absent an unexpected downturn, I believe the US economic backdrop is relatively strong and supportive of higher equity prices in certain sectors as we transition into 2019. The benefits of fiscal stimulus combined with aggressive deregulation should continue to be felt in the coming year, in my view. That said, this outlook is not without risk and investors have no shortage of issues to worry about — trade tensions (most notably between the US and China) and concerns about the current level and trajectory of interest rates have both cast a shadow on the stock market.

Trade wars have historically been a lose-lose scenario, which makes a timely resolution even more important. The longer the conflict continues, the greater the potential for higher inflation, slower economic growth and disruption in the stock market. While the bottom line effects are hard to accurately quantify, companies have been commenting more frequently that ongoing trade wars are negatively affecting corporate profits as 2018 comes to a close. A global power management company is anticipating US$110 million in tariff-related costs in 2019, which could likely be passed through to consumers in the form of higher prices. A large industrial company noted in October that higher input costs, while not all trade-related, outstripped price increases by US$50 million in the third quarter. I believe that a favorable trade-related outcome should help alleviate many of the concerns surrounding more economically sensitive companies.

 

We’re optimistic about energy
In our view, energy stocks represent the largest opportunity for fundamental improvement in the market today. Following the largest downturn in oil prices in decades, major energy companies cut capital expenditures about 50% since 2014.¹ The cuts had a significant impact on future production as many of the oil projects are long-tailed and can take three to five years to bring on.

1 Source: Bain & Company, “Accelerating Capital: 2018 Oil & Gas Industry Planning Outlook,” Nov. 22, 2017. Oil majors cut capex spending from $215 billion in 2013 to $118 billion in 2016.

 

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