A series highlighting news and trends in international business that matter to investors looking for opportunities outside of Canada.
It’s a tough time for investors engaged in scanning the globe for growth opportunities. The Eurozone is expected to experience just modest growth, emerging economies are struggling and the biggest of them all, China, is decelerating as it transitions from an export-oriented economy to a more domestic-focused one. Worst of all, no one really knows how fast the former engine of the world economy is losing steam. China’s slowdown has been bad news for commodities and energy, which has hit developed-economy exporters such as Canada and Australia.
Given consensus forecasts for slow worldwide growth in 2016, one of the bright spots on the globe remains the United States, which is in the happy convergence of an expanding economy, falling unemployment, a strong currency and expectations of higher consumer spending.
The United States is unique among developed economies for its self-sufficiency: It is not overly reliant on exports for growth and about two-thirds of economic activity is driven by domestic consumer spending, which is expected to benefit from low energy prices, cheaper imports and improving job prospects and some wage gains.
Given the U.S. economy’s expected strength in the coming year, what are the sectors that forecasters expect to outperform in 2016?
Your best bets are likely in health care, technology, consumer discretionary, financials, and perhaps even the beaten-up housing sector, according to industry experts.
So what do the sectors have going for them?
Why health care? In a word, demographics. The baby boomers are entering their golden years and there are about 75 million of them, accounting for about one-quarter of the U.S. total population. As they age, they are boosting the health-care sector, which was one of the top performers in 2015 and is forecast to be the most profitable economic sector again this year by Norwalk, Conn.-based research firm FactSet Research Systems Inc. Health care is also a huge category, including everything from medical equipment makers to drug manufacturers, biotech companies and managed-care providers.
Scott Anderson, chief economist with San Francisco-based Bank of the West, noted health care’s positive story goes beyond the greying of America. “Certainly that is an important secular trend … but we are also seeing innovation in biotech that is exciting and could reap significant rewards in the years ahead. Investors are searching for yield and looking for those investment opportunities. We are seeing that certainly showing up in venture capital and angel investing, as well as in stock prices for some of those companies.”
One of the biggest technology showcases is the Consumer Electronics Show in Las Vegas, which includes thousands of companies ranging from tech giants to startups, upstarts and disruptors. This year, the buzz is dominated by self-driving cars and wearable technology (such as smart watches). Last year, consumer technology was one of the most profitable sectors, according to FactSet, and was only slightly behind another highly profitable tech sector – technology services. Both are forecast by FactSet to generate high profit margins again this year. Beyond the consumer electronics sizzle, the sector will continue to benefit from the increasing growth of mobile and the continued connectivity of devices, as well as robust funding from investors looking for the next Google or Facebook.
The U.S. consumer was on the ropes after the great 2008-09 recession, but she is apparently back and ready to spend. In November, U.S. personal income rose for an eighth consecutive month on rising wages, a trend that is expected to continue. Factor in, as well, low unemployment and the stimulative effect of low energy prices, particularly for gasoline. “I think people sometimes underestimate just how stimulative $35 oil is for that U.S. consumer,” said Craig Jerusalim, portfolio manager of Canadian equities with CIBC Asset Management in Toronto. In 2015, the U.S. consumer discretionary sector recorded an 8.4-per-cent gain, making it the top-performing S&P 500 sector for the year.
The U.S. financial sector, which includes banks, insurers, brokerage firms and money managers, is poised to benefit from rising interest rates if the U.S. Federal Reserve keeps moving away from its zero-interest policy with regular quarter-percentage-point rate hikes. The financial sector also profits from higher levels of corporate manoeuvring (such as mergers and acquisitions, share repurchases and capital spending), all of which remain popular in a low-rate environment.
“Financials are going to do quite well in this environment,” said Bank of the West’s Mr. Anderson. “With the Fed looking at at least three interest rate hikes this year, maybe even more than that, I think that is going to be a better environment for the U.S. banking system and you are going to see that, I think, reflected in stock prices.”
Housing and Real Estate
The real-estate crash preceded the great recession and a turnaround has been a long time in the making, but it is here, according to most observers. Irvine, Calif.-based analytics firm CoreLogic Inc., in its 2016 U.S. housing outlook, forecasts higher but still manageable rates for home owners, pent up demand (first in rental) from increasing family formation, and an increase in home prices. The U.S. National Association of Realtors is forecasting 1.3 million housing starts in 2016, a rise of more than 10 per cent, as the industry finally appears to be climbing out of the aftermath of the 2008-09 crash. Housing starts “need to rise robustly in order to meet the overall demand. There is a housing shortage currently,” says Lawrence Yun, the association’s chief economist and senior vice-president of research.
“Historically, housing starts need to be 1.5 million based on the population growth in America, but we have essentially been at depression or recession levels for eight years so there is a lot of catching up to do.”
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