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RBC WM sees strong economic growth to support US equities

RBC Wealth Management likes the financials, energy and information technology sectors.
Jasmine Duan, RBC WM Asia

Above-trend GDP growth should set the stage for moderately higher US earnings growth and stock prices in 2022. Historically, in environments where economic growth has exceeded the long-term average, it has been a positive backdrop for stock prices, Jasmine Duan, investment strategist at RBC WM Asia told FSA.

Major central banks seem set to begin raising interest rates, yet equity markets typically perform well surrounding the first rate-hike, she said.

“If we look back on 17 different US Federal Reserve rate hike cycles, going back to 1954, the experience of markets in the year leading up to that first rate-hike has tended to be positive, posting double digit returns for equities.”

RBC WM believes value and cyclicals are likely to assert leadership early in the year before growth and secular stocks reclaim the spotlight.

Sector preferences

“In terms of sectors, we like financials, energy and information technology. As we think the economy is on a sound footing and should continue to expand, it should support an improving growth and interest rate environment, providing revenue growth for the financials. We also expect solid earnings growth together with strong balance sheet growth and healthy credit to drive valuations higher this year,” she explained.

The firm’s bullish stance towards the energy sector reflects underlying strength in crude oil prices, limited appetite for organic investment, free cash flow generation supporting balance sheet deleveraging and abundant shareholder returns, and manageable cost inflation. Analysis by RBC Capital Markets also shows the sector tends to outperform when the economy is in recovery or accelerating, which the world is currently in.

Information technology tends to move inversely with trends in the 10-year yield and inflation expectations, suggesting that this may be an area to look to for leadership later of the year, according to Duan. In 2022, the firm will focus on companies either with strong new product launches, or those that can see earnings recovery from continual economic reopening or have reached some levels of valuation support.

RBC WM is also positive on “sustech” stocks in the medium- to long-term, namely technology companies that can help “to solve global sustainability issues”. SusTech is centred on five key themes, namely greentech, healthtech, fintech, foodtech/agritech and smart cities.

Regional views

In addition, the firm recommends an overweight to European equities. “Ongoing fiscal support and a relatively dovish European Central Bank should continue to support the economy, while supply chain disruptions should start to diminish over the course of 2022,” said Duan. Moreover, the region typically outperforms as bond yields rise, and valuations remain attractive on most measures, she said.

In Asia, higher vaccination rates and accelerated reopening would provide a more stable macroeconomic environment, which should support business sentiment and turn into positive revisions of profit forecasts. Foreign investors currently have light positions in the region, and RBC WM sees outperformance by some Asian markets if earnings growth comes in faster than expected given the attractive valuation. Within Asia, the firm is positive on Japan and ASEAN equities.

Part of the Mark Allen Group.