Astute Stock Picking Will Become Increasingly Important for Investors in 2017

The information technology and health care sectors offer the most attractive valuations for stock investors heading into 2017, as once-favored industries could be on the wane.

Stock selection, in both developed global equity and emerging markets, will become “more crucial” in producing positive returns, said Chris Alderson, head of international equity at Baltimore-based T. Rowe Price. However, investors should expect more modest returns and increased risk in light of the maturation of a multi-year bull market, he added.

Alderson was among several T. Rowe Price speakers who spoke at a press briefing as part of the company’s recent 2017 Global Market Outlook in New York. T. Rowe Price Chairman Brian Rogers also spoke after recently making news by announcing he planned to step down from his additional role as the company’s chief investment officer in March 2017. But he let his colleagues assess the market outlook in detail.

“As the bull market ages, top-down macroeconomic and political news – including the outlook for China, concerns over Europe and volatility in energy and commodity prices – is dominating the global equity markets like never before,” Alderson said. “For patient, long-term investors, such uncertainty typically creates buying opportunities. We remain constructive on global equities, but market returns are likely to be more modest.”

Among U.S. equity markets, the Russell 1000 Growth, Russell Mid-Cap Growth and Russell 2000 Value Indexes appear to have the most attractive valuations among U.S. equity indexes, said Larry Puglia, portfolio manager of T. Rowe Price’s Blue Chip Growth Fund and U.S. Large-Cap Core Growth Equity Strategy.

“S&P 500 earnings should rebound in 2017 and 2018, reflecting a sharp improvement in energy,” Puglia said. “However, analyst projections have sometimes been optimistic, so some caution is warranted.

“We do not expect gradually rising interest rates over the next 12-18 months to be a stumbling block for equities,” Puglia said. “In the U.S. equity markets, defensive low-volatility sectors like utilities, telecom and staples have outperformed, but this trend may be changing as we enter 2017.”

Rising interest rates, which have been exhibited since Donald Trump’s election as the next U.S. president on Nov. 8, thus far have been accompanied by rising stock prices.

Further support for stock prices could come from earnings growth, which is expected to rebound in 2017, according to T. Rowe Price’s outlook for U.S. equity markets.

The U.S. economic expansion has room to run and near-term risk of a recession is low, said Alan Levenson, T. Rowe Price’s chief U.S. economist.

“We expect a slight improvement in the global economic environment in 2017, helped by the growth rebound in the U.S., Canada, Brazil and Russia, but deleveraging and restructuring headwinds persist,” Levenson said.

As for emerging markets, sovereign macroeconomic fundamentals have gradually improved due to significant political reforms in key markets, tighter fiscal budgets, healthy current account balances and strengthening growth prospects, said Samy Muaddi, portfolio manager of T. Rowe Price’s Emerging Markets Corporate Bond Strategy.

“After several years of relatively low growth, emerging markets have started to outpace developed markets by a large margin, aided by economic recoveries in Brazil and Russia, rebounds in several smaller countries and improving sovereign macroeconomic fundamentals,” Muaddi said.

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Paul Dykewicz is the editorial director of Eagle Financial Publications, editor of StockInvestor.com and DividendInvestor, a columnist for Townhall and Townhall Finance, a commentator and the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a Foreword by legendary football coach Lou Holtz. Visit Paul’s website at www.holysmokesbook.com and follow him on Twitter @PaulDykewicz.