Macro View

As of March 1, 2017

Emerging Markets Continue to Show Resilience

  • We see significant variations across emerging market economies. While some appear to be strong, others are adjusting to commodity prices that have fallen after years of unsustainable growth.
  • GDP growth in the US and internationally should benefit emerging markets, which tend to benefit from stronger global economic growth.
  • Economic risks such as the threat of government regulation, fluctuating exchange rates and political unrest, appear to have eased in many emerging markets (most notably in China).
  • A strengthening dollar, protectionist trade policies and rising rates in the US could present challenges for many emerging markets, including the risk of capital outflow.

Global Growth Accelerates Despite Political Uncertainties

  • Improving economic conditions and an uptick in manufacturing have raised global growth forecasts for many developed markets in 2017.
  • Political uncertainty has persisted since the Brexit vote last June, but we have not seen a material impact on economic growth in the UK or eurozone. The rise of populism and decline of globalization could threaten future economic expansion in key European countries.
  • Government austerity measures and accommodative monetary policies are fading in many developed markets. The European Central Bank extended its quantitative easing program until December 2017, but will trim its bond purchases from €80 billion to €60 billion a month.
  • Japan’s economy has shown significant improvement in wages, inflation and corporate fundamentals.

Pro-Growth Policies Bring New Optimism

  • The US economy continues to improve, with consistently stronger manufacturing activity, personal consumption data, employment figures and corporate earnings growth.
  • A pickup in consumer confidence, optimism among small business owners and other survey data suggests a re-acceleration of US economic growth
  • President Trump's pro-growth policies have already provided regulatory relief for some businesses, but passing legislation in the areas of healthcare, tax reform and infrastructure modernization will be more complicated and time-consuming.
  • The Fed is expected to continue raising rates as the US economy strengthens and inflation moves closer to its target of 2%.

Sector View

From the Fiduciary Trust Equity Strategy Committee
As of June 1, 2017

Financials: Overweight

Deregulation, Tax Reform and Rising Rates Favor Financials

We upgraded Financials to a modest overweight as weakness in the market brought valuations down to a level that represented an attractive buying opportunity in our view. While some of the Trump administration's pro-growth policies have encountered resistance, we continue to believe that regulatory relief, tax reform and rising interest rates will benefit Financials.

Sector Positives

  • Regulatory relief still appears possible as President Trump surrounds himself with pro-business cabinet members. While we do not expect Dodd-Frank to be repealed entirely, it appears that the law’s most contentious and burdensome requirements will be modified or eliminated, which could reduce compliance-related costs for banks and other businesses. Easing liquidity requirements could also help boost bank earnings.
  • Tax reform could be especially beneficial for financial services companies, which currently pay tax rates that are among the highest in the country, across all sectors and industries. A reduction in the corporate tax rate could boost earnings proportionately.
  • Rising interest rates typically work in favor of banks and other financial firms that earn interest on mortgages and other types of loans they issue. If the Fed raises rates as expected in 2017 and 2018, analysts estimate bank earnings could improve by 8%.

Sector Negatives

  • Credit card debt recently surpassed $1 trillion for the first time since 2008 and loan loss provisions are rising, especially in the automotive lending business.
  • Protectionist trade policies in the US and abroad present the risk of economic destabilization.
  • Capital requirements for Systemically Important Financial Institutions (SIFIs) are still unknown.

The financials sector includes banks, thrifts, diversified financial services companies, asset managers, investment banks, insurance and reinsurance companies, real estate investment trusts (REITs), developers and managers of real estate, and real estate service providers.

Energy: Marketweight

Pro-Growth Policies are a Catalyst But Geopolitical Tensions Persist

We are maintaining a marketweight recommendation for Energy as a wide variety of geopolitical factors influence prices and stability.

Sector Positives

  • OPEC agreed to reduce production in 2017, although the risk of non-compliance is present.
  • Supply and demand should begin to balance out after a year of slower production.
  • Global economic growth is advancing, albeit at a slow pace, which bodes well for demand.
  • A considerable amount of cost flexibility could soften the negative effects of low oil prices.
  • Technological advancements should improve oil well efficiencies, which could lead to upside surprises at the company level.

Sector Negatives

  • Rising rig counts in North America could exacerbate oversupply.
  • Geopolitical risks are likely to persist in Eastern Europe, the Middle East and Africa.
  • Higher-than-expected production potential in Iran and Saudi Arabia could push supply higher.
  • The space is fragmented, with many players carrying low-quality balance sheets.
  • Cost of capital is also relatively high in the Energy industry.

The energy sector includes companies that produce and distribute energy. This includes the petroleum industry, containing oil companies, refiners and gas stations; the gas industry, including natural gas extraction and coal; the electrical and nuclear power industries, and the renewable energy industry.

Health Care: Overweight

Short-Term Pricing Pressure but Favorable Demographic Trends

We are maintaining an overweight to Health Care, encouraged by strong earnings growth projections and an aging global population.

Sector Positives

  • Strong future demand is expected for innovative and effective medical treatments in areas such as cancer, diabetes, hepatitis C, and Alzheimer’s.
  • Large overseas cash balances held by Major Pharma and Biotech companies could be repatriated under the President’s tax holiday, offering the potential for an uptick in M&A.
  • Value-based business models are gradually replacing the volume-based approach, a scenario that creates both opportunities and challenges for healthcare providers and suppliers.
  • Valuations are historically low, reflecting the concerns on drug price pressure, while the growth prospects long term are not factored in.

Sector Negatives

  • The Affordable Care Act repeal effort and the threat of government intervention in drug pricing have been weighing on Health Care valuations since the 2016 election cycle. A Trump victory eased those concerns to some degree, but uncertainty continues.
  • The Med-tech subsector is being closely monitored by the FDA, which could impose a more rigorous review/approval process.
  • Budget constraints could reduce government spending on Medicare and Medicaid. The federal government accounts for the largest share of healthcare spending in the US (approximately 29%), according to the Centers for Medicare and Medicaid Services.

The health care sector covers two primary industry groups: healthcare service providers and firms that make health care equipment, and firms related to pharmaceuticals and biotechnology.

Industrials: Overweight

Stronger Earnings Could Drive Capex Improvements

We upgraded Industrials to overweight in mid-May based on stronger earnings and expectations for a pick-up in capital expenditures. The sector has also benefitted from stabilization in China’s industrial production, the commodities market and energy prices. While manufacturing activity appears to have peaked, we expect the global economy to continue expanding, which could fuel demand for the products and services produced by industrial companies. Growth prospects look brightest among industrial companies focusing on technology and manufacturing automation.

Sector Positives

  • Energy prices bounced back from multi-year lows and appear to have stabilized.
  • Infrastructure spending is likely to pick up in 2017 or 2018.
  • The transportation category continues to offer attractive opportunities, ranging from traditional railroads to companies that are pioneering “intelligent transportation grids.”
  • Shipping and delivery companies usually see a pickup in demand when the US economy is expanding and corporate budgets improve.
  • Defense spending could accelerate after years of government budget constraints. We believe the defense industry could be entering a period of protracted growth, possibly extending for the next five or ten years.

Sector Negatives

  • A stronger US dollar could strain sales and earnings growth for US multinationals.
  • A border adjustability tax could hurt companies with international exposure by making it more expensive to import materials.
  • Weakness in the Chinese economy, the potential for a spike in commodity prices and protectionist trade policies in the US and abroad could also affect companies with a strong international presence.

The industrial sector encompasses transportation services and infrastructure for roads, rail, airlines and marine services. It also includes manufacturers of aerospace and defense equipment and companies providing electrical equipment, building products, and commercial services and supplies.

Telecommunications: Underweight

Intense Competition, High Costs Weigh on the Telecom Sector

We are underweight telecom, a relatively mature industry with saturation levels that could limit the potential for meaningful topline growth in the future.

Sector Positives

  • Tax reform and other pro-growth policies could benefit the sector.
  • Demand has been growing for wireless data (mobile video streaming) in the US.
  • A new FCC chairman has vowed to eliminate unnecessary regulations and “remove those rules that are holding back investment, innovation and job creation.”
  • The anticipated repeal of Title II (net neutrality) could help cable providers charge more for internet access.

Sector Negatives

  • Broadband providers face competition from Over-the-Top providers like DirecTV Now, Netflix, HBO, Dish, etc., which encourages consumers to cut the cord.
  • Competition is intense and costs are high in the telecom industry. Major competitors are seeking growth through acquisition.
  • Dividend yields can be attractive for income-oriented investors but could be hurt by rising rates.

The telecommunications sector includes wireless communications, equipment, processing systems and products and carriers.

Information Technology: Overweight

The Rise of Cloud Computing and a Growing Economy Lift Tech

We continue to recommend an overweight position in the IT sector based on improving economic conditions and the rapid advancement of cloud computing.

Sector Positives

  • Software-as-a-service platform vendors are rapidly taking share from “on premise” IT vendors.
  • Smartphones and tablets are taking market share away from PCs and other traditional hardware products. We expect minimal top-line growth in the hardware category.
  • The semiconductor industry still has strong fundamentals and demand for semiconductors and software should remain strong as cloud computing gains momentum.
  • Mergers and acquisition activity and capital expenditures should continue as large, cash-rich platform companies seek to expand their scope and leverage their scale in what remains an attractive (but rising) interest rate environment.

Sector Netagives

  • We remain cautious about overpaying for highly-valued speculative stocks in the IT sector. Our approach is to identify established companies that offer the ability to adapt as well as newer entrants with agility and innovation.
  • The network security market remains fragmented, with niche players focusing on narrow segments of the industry.
  • Weak demand for PC-related products over the past several years could suppress stock prices across the supply chain.
  • Trump’s tenuous relationship with China and strict immigration policies could lead to higher prices for tech products and reduce the ability to recruit software engineers from abroad.

The information technology sector includes manufacturers and providers of computer, data, and electronic equipment and services. It includes hardware, software, networking and telecommunications equipment manufacturers, IT services, providers of internet services; mobile phone producers; and semiconductor manufacturers.

Materials: Marketweight

Geopolitical Risks with Pockets of Growth

Our marketweight position in Materials reflects our focus on specialty chemicals and processing companies as opposed to commodity-sensitive companies.

Sector Positives

  • The rebalancing of the Chinese economy from exports to consumption is likely to benefit chemical producers that have exposure to end markets such as automobiles and travel.
  • Construction aggregates offer pockets of opportunity among companies that operate on a local, geographically segmented basis and offer stable pricing dynamics. Aggregates include sand, gravel, crushed stone, slag, recycled concrete and geosynthetic materials.
  • Companies that are associated with roads, bridges and other transportation infrastructure could benefit from US government stimulus spending, although we do not expect infrastructure spending to increase until the end of 2017 or 2018.

Sector Negatives

  • Risks include the potential for economic deterioration in China, uncertainty regarding the size and scope of government spending around the globe, and potential geopolitical shocks.
  • Since China’s commodity super cycle came to an end it appears unlikely that there is another emerging economy positioned to take its place, with massive government spending.
  • Metals and mining companies faced an overabundance of supply in 2016 and upstream producers should continue to see major pressure as price forecasts continue to be pessimistic.

The materials sector contains companies engaged in the extraction and processing of raw materials such as metals, chemicals, wood and paper products, and construction materials.

Consumer Staples: Underweight

Limited Growth Opportunities, High Valuations

We are underweight Consumer Staples, in part, because of limited opportunities for growth and full valuations.

Sector Positives

  • We are focusing on dividend growth rather than dividend yield stocks particularly in this sector. Companies that operate on an international scale and have demonstrated the ability to adapt when consumer preferences change.
  • Cost-cutting measures have improved profit margins for many companies in the Consumer Staples sector.
  • Product innovations or expansions and new business channels have become a higher priority for many companies in this sector as they adjust their business models to keep pace with changing consumer tastes.
  • Rising inflation bodes well for consumer staples as they generally can pass on price increases to consumers.

Sector Negatives

  • Volume upside seems limited given the fact that sales growth in 2016 was supported by price increases that were passed on to customers.
  • A strengthening dollar could work against Consumer Staples companies in 2017 since more than half of the sector’s revenues come from outside the US.
  • Rising rates and an improving economy could also work against Consumer Staples, which have historically strengthened when the economy is weak and rates are low.

The consumer staples sector includes consumer items that are often considered household necessities. It includes personal and household products; food products; beverages and tobacco industries.

Utilities: Underweight

Expectations for Rising Rates, Inflation Make Utilities Less Appealing

We are underweight Utilities given the outperformance of the sector in 2016 and the potential for a pickup in inflation in 2017.

Sector Positives

  • Mergers and acquisitions continue.
  • The sector offers dividend income potential as well as a hedge against market volatility, with historically low correlations to the S&P 500.
  • Renewables offer of pockets of growth potential.
  • Utilities have modest exposure to international markets, reducing the risks posed by protectionist trade policies, or a stronger US dollar.

Sector Negatives

  • Tax reform and other pro-growth policies are not expected to benefit utilities as much as they benefit other more economically-sensitive sectors.
  • Demand for electricity has weakened due to slow economic growth and higher energy efficiency.
  • The potential for commodity price volatility and the threat of rate hikes hang over the sector.
  • Emissions standards become more costly over time, especially given recent EPA actions.

The utilities sector covers a variety of industries that generate and deliver power and water. It includes nuclear facilities, electric and gas utilities, independent power producers, energy traders, and generators and distributors of renewable energy.

Consumer Discretionary: Underweight

Retailers Face Economic Challenges, Competitive Threats

We downgraded the Consumer Discretionary sector to underweight in February due to slowing consumption, rising energy costs and inflation.

Sector Positives

  • An improving labor market is lifting consumer confidence.
  • Rising home prices indicate that the housing market may still have room to improve, which could make housing-related stocks more attractive. In January, new home sales rose 3.7% versus December and 5.5% compared to January of 2016.
  • On-demand entertainment continues to gain appeal with consumers, a trend that favors media companies with extensive content libraries and broad distribution capabilities.

Sector Negatives

  • E-commerce poses a long-term challenge for traditional retailers and apparel manufacturers.
  • A border adjustment tax could hurt the US apparel and auto industries, which import more than 30% and 20% of their manufacturing supplies, respectively.
  • Tax reform may not be beneficial. Our analysis of US income tax cuts from 1981 through 2001 was unable to show that a lower tax rate results in better sales or profitability for consumer goods companies.
  • Essentials such as healthcare and education are capturing a greater share of consumer wallets, leaving less for discretionary spending.
  • Rising interest rates are pressuring the peaking auto industry, where sales have been supported by incentive programs, discounting and easy financing.

The consumer discretionary sector includes companies that sell non-essential goods and services. It includes textiles, apparel and luxury goods; retailing; media; leisure products; hotels and restaurants; and automobiles and components.

Tactical View

From the Fiduciary Trust Asset Allocation Committee
As of March 1, 2017

Cross Asset

We see the brightest prospects for equity market returns in Europe, Japan and other non-US markets where economic and corporate fundamentals are strengthening and financial conditions remain favorable for growth. We are underweight fixed income in favor of cash and we encourage an allocation to alternative investments as a hedge against volatility.

  • Equities. We prefer non-US developed markets where economic fundamentals are improving, valuations appear more attractive and geopolitical risks are beginning to ease.
  • Fixed Income. With the Fed on a path toward normalization, we see limited total return opportunity in bonds, but recognize their potential to generate income and mitigate portfolio risk.
  • Alternatives. We continue to recommend liquid alternatives for risk management and diversification. Alternatives traditionally outperform when markets are volatile.
  • Cash. A cash allocation remains in place to provide "dry powder" for future opportunities and guard against market volatility in this environment of political transition.

Fixed Income

With the Fed on a path toward normalization, we see limited total return opportunity in bonds, but recognize their potential to generate income and mitigate portfolio risk.

  • Municipal bonds. Within fixed income, we consider municipals attractive on an after-tax basis. Munis have again become more attractive than select areas of the taxable market.
  • US Government bonds. In our view, low-yielding Treasuries offer insufficient compensation in an environment of rising interest rate risk.
  • US Investment-Grade Corporate bonds. In taxable fixed income markets we believe investment-grade corporate bonds are attractive against a backdrop of strong demand and an improving earnings outlook
  • US Securitized bonds. Fed policy could present risks to the technical dynamics within mortgage-backed securities. Moreover, we are concerned about higher rates and relatively tight spreads.


Pro-growth fiscal policies could be supportive in the US, but valuations appear full and risks largely overlooked. International developed markets are gaining appeal.

  • US Large-Cap. We are approaching US large-caps with a high degree of selectivity as correlations have faded, valuations appear full, and protectionist trade policies present risks.
  • US Mid-Cap. We expect mid-caps to benefit from many of the President's pro-growth policies, while also carrying slightly less sensitivity to a rising dollar than large-caps.
  • US Small-Cap. Small-cap stocks may be less sensitive to protectionist trade policies since the majority of revenues are generated domestically.
  • International Large-Cap. Valuations appear more attractive in international markets than the US. Economic growth has accelerated in Europe, although political risks exist. Japan appears to offer more political stability and rapidly improving economic fundamentals.
  • International Small-Cap. The risk/reward tradeoff in international small-caps, which are sensitive to economic and political shocks, appears less attractive than the balance of potential risks and rewards for larger companies.
  • Emerging Markets. Despite recent stabilization in many emerging market economies, we are mindful of risks posed by rising rates, protectionist policies and a stronger US dollar.


We continue to recommend liquid alternatives for downside risk management, diversification and potential return enhancement.

  • Hedge funds. We believe nontraditional investment strategies offer the potential for stronger risk-adjusted returns than they have during the past several years. Economic trends and market currents that favored passive investing over active management in general, and worked against alternative strategies in particular, appear to be fading, disappearing or completely reversing.
  • Commodities. We have a favorable view of commodities. There has been a broad improvement in economic fundamentals such as manufacturing data and other global economic indicators. China’s economy and global commodity prices appear to have stabilized.
  • Real estate investment trusts. We see above-average income and long-term growth potential in selected REITs, which can be effective portfolio diversifiers, given their historically low correlation to other equity market sectors. REITs have offered relatively high yields and consistent dividend growth, with better long-term growth prospects than many other defensive market sectors.

This communication is intended solely to provide general information. The information and opinions stated are as of the dates specified, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA institute.