US equities will be the best performing sector next year, according to exchange-traded fund provider WisdomTree Europe.
The company thinks shares in US small and mid cap firms have a lot to gain from the legislation Donald Trump has proposed.
Shortly after last month’s US election results, the market began to immediately discount expected policy changes, including cuts to tax rates and a boost to spending on defence and infrastructure, which many think will spur growth in the US economy.
This is raising expectations for faster private sector job growth, higher inflation, higher interest rates, and a stronger dollar.
WisdomTree said investors can take advantage of this bullish environment by focusing on US equity funds.
“In our view, mid and small caps is the place to be,” the firm stated in its latest outlook, saying Mr Trump’s plan is likely to result in greater economic activity, industrial production, investment and consumption in the US.
However, when it comes to US large cap companies, WisdomTree said investors should focus on dividend strategies.
“As rates have declined in the first half of the year, we’ve seen success with our core dividend strategies. However, as the macro environment changes it is important to focus on the rising rate environment.”
In the first eight trading days, the provider saw the US market rotate away from utilities, real estate, consumer staples and telecom, and towards financials, industrials and consumer discretionary.
“Given that rising interest rates should create a headwind for the higher yielding, more defensive parts of the market, we think investors should tilt towards ‘quality’ stocks in their US large cap exposure.
The ETF provider also said Japan is a “bright spot”, particularly when looking at the recent depreciating yen, and suggested investors focus on Japanese hedged equity funds.
“To get ‘pure’ exposure to Japan equities without the USD/JPY currency fluctuation, we believe our range of currency hedged Japan ETFs could suit this market environment.”
“We expect Japan will be a continued focus in terms of international equity markets for 2017.”