The global economic recovery looks set to continue in 2017, according to Société Générale Private Banking (SGPB), which says a more balanced policy-mix from central banks should support the recovery and boost corporate profits. 
Political events in Europe and the US have barely moved the equity market needle in 2016 with investors preferring to look at fundamentals and concentrate on the macro picture, something looks set to continue in 2017.
“A number of surprises have supported equity performances these last few weeks,” SGPB analysts reported. “The initial sell-off following Mr Trump’s victory was short-lived as investors began to hope that the pledged fiscal stimulus and pro-business measures would boost US growth in the short term.”
As the below graph shows, all of the major equity markets remain in positive territory year-to-date despite a number of shock events including Donald Trump’s election success in the US, the Brexit referendum result and the recent ‘no’ vote in the Italian referendum.
Performance of indices in 2016
Source: FE Analytics
The strongest-performing area has been the emerging markets, which have returned 31.09 per cent year-to-date, but SGPB tips developed equity markets in 2017.
“Overall, we believe developed equity markets could offer better upside potential in 2017 thanks to the ongoing economic recovery and strong pick-up in earnings,” the bank noted.
However, with political risk still on the agenda in Europe, policy uncertainty in the US and the return of inflation and interest rates potentially putting pressure on already high valuations, the private bank believes investors need to be selective.
Below analysts at SGPB outline their preferred equity regions and explain how they will approaching each area in 2017.
US
The MSCI USA is currently trading at its highest level since mid-2009, a 20 per cent premium to its 20-year average and 17 per cent higher than most other developed countries.
“With rising inflation, higher bond yields and the US Federal Reserve likely to raise key rates, the US market seems most at risk of de-rating in the coming months,” analysts reported.
The bank says that traditionally Fed tightening cycles have caused more volatility, as shown by the most recent hike at the end 2015, but notes that the environment is different now, with slow rate hikes already priced into the market.
On the positive side, earnings have started to recover after two years of declines and SGPB says this looks set to continue in the coming quarters thanks to a global recovery, strong US demand and higher energy prices.
“Sector-wise, rising interest rates, a steeper yield curve and a stronger US dollar are generally more favourable to domestic value sectors (e.g. financials) than growth sectors or areas with high sensitivity to rising interest rates (staples, utilities).
“In the longer term we favour sectors supported by constant innovation and high profitability such as technology and healthcare.”
Europe
While Europe has lagged the wider market over the last few years, SGPB believes there are pockets that are poised for outperformance in 2017.
Over the past five years the MSCI Europe ex UK index has underperformed the MSCI World by 28.7 percentage points, with much of this occurring over the last year.
Performance of indices over 5yrs
Source: FE Analytics
“We believe that Eurozone equities will catch up if the global economic context improves and if financial conditions remain favourable in the region,” analysts at the bank noted.
“Although we should not expect governments to provide much stimulus in 2017 given the heavy political agenda, the fiscal stance will nonetheless be relaxed to boost the economy, which will add to the positive effects of the European Central Bank’s ultra-accommodative monetary policy.”
SGPB expects the ECB’s asset purchase program to extend into next year as inflation remains below its 2 per cent target, meaning corporate profits are likely to improve in the coming quarters.
“Sector-wise, we favour consumer discretionary – which benefits from good earnings prospects, high return on equity and reasonable valuations – and technology which has strong growth momentum, margin expansion and long-term innovation,” it added.
Emerging markets
Following the election of Donald Trump in the US, emerging markets have fallen 8.54 per cent, although they remain 31.09 per cent up on the year-to-date.
Performance of indices in 2016
Source: FE Analytics
Despite a strong 2016, SGPB believes investors should not “throw the baby out with the bathwater”.
“Emerging equity markets experienced a sharp sell-off in the aftermath of Mr Trump’s victory as the President-elect had pledged a sharp increase in tariffs on imports, especially from Mexico and China.”
“However, we believe markets have gone too far too fast,” it reported.
While the asset class has lost some support from low interest rates and a weaker US dollar, higher commodity prices, a stable economy in China and an improvement in economic activity across many countries make SGPB Banking still positive on the area.
“In the emerging world we still favour Asia. Given the uncertainty surrounding world trade after the emergence of anti-globalisation policies, we would prefer countries where domestic demand represents a larger share of GDP and where structural reforms to boost long-term potential growth are underway,” it added.
The private bank highlights infrastructure firms as potential winners, with China and more generally Asia-Pacific leading the expansion.