strength of earnings growth late in the cycle will be one of
the key investment themes in 2017, according to Prudential
Portfolio Management Group (PPMG), but the benefits will not be
spread evenly around the world.
Japan was highlighted as market where Prudential expects an
earnings recovery expected to come through late in the
David Shairpe, head of research, said: "The late-cycle
reacceleration tends to favour the more cyclical equity markets
– those that will see a jump in earnings in response
to a pickup in activity and in response in a pickup in their
The US is at the other end of the spectrum after its rapid rise
over the last 12 months. The investment environment in the US
is mature, said Shairpe: "In terms of valuations, they are very
"Our view is that the US is pretty fully-priced. US equities
are richly priced and that comes through fairly consistently."
Shairpe added that the case for the US, if there even is one,
is a turn in the earning cycle. But in his view, there is not a
"compelling enough case."
The US equity risk premium has fallen to 3%, which is the
lowest on this series since July 2004. "We don’t
see a massive amount of value," Shairpe said.
The outlook is for 2017 is brighter than it has been in recent
years largely due to the expectation for expansionary fiscal
policy. While Prudential expects fiscal easing to
materialise, it does not expect it in the first half of the
In Japan the central bank’s monetary policy
becoming less effective so the government may be forced to turn
to more expansionary fiscal policy to boost demand. The same
situation exists in the eurozone.
"Monetary policy cannot be the only spur for economic growth,"
said Leila Butt, senior economist at Prudential. "It must be in
tandem with fiscal policy and structural reform."
Eurozone growth has been more tepid than in the US and the UK.
"Accommodative monetary policy, less restrictive fiscal policy
and an improving labour market will act to sure up eurozone
growth such that it pushes growth by 1.5% this year," said
Meanwhile,in the US, on the back of the incoming Republican
administration, expectations for more fiscal policy have
already resulted in a late-cycle spurt to growth. Conditional
on the actual fiscal stimulus, Prudential expects the Fed to
tighten monetary policy with three 25 basis points (bps) hike
rates this year.