UBS: What do Investors think is in store for 2017?

Where do we get pushback on Outlook 2017?

Earnings growth is the key for European Equities in 2017. We forecast 8%: the bottomup consensus is 13.5%, but this has been downgraded for 6 years in a row and onaverage by 12 percentage points. We see earnings momentum and critically revenuemomentum as stabilising and massive base effects at work (half of the consensusgrowth rate comes from Commodities and Financials). But given the many false dawnsthere is some (understandable) scepticism from investors. Interestingly, at our Outlook conference in Frankfurt only 14% of investors thought that earnings growth would be 10% and above (Figure 1).

Cyclical Rotation: How much longer can it continue?

Cyclicals have outperformed Defensives by 27% since the low in bond yields on July 8.This is the 2nd best run in a decade and not far behind the 34% move in 2009 after the Financial Crisis. The move has even got ahead of the sharp rise in bond yields (Figure 2). Valuations have normalised somewhat – the DY relative and P/BV relative are now both close to long run averages. We stick with a slight tilt to cyclicals in our sector strategy, but would refrain from chasing all cyclicals here.

What did we learn from our colleagues?

Our economics team expect 2017 to be the first time in 7 years that global nominalGDP growth accelerates. We highlight work from our macro strategy team on theimpact of US fiscal policy on bonds and equities (p.18) and work from our Banks teamon the correlation between Banks performance and inflation expectations. Finally, ourOils team highlight the estimated cut in upstream capex over 2014-2016 is close to the GDP of Belgium. We upgraded the Energy sector to overweight on November 15 andargue why it is still an overweight (see pp 14-15).

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