Richard Bernstein is a well-known name among active managers, and a big proponent of ETFs. Today his firm, Richard Bernstein Advisors, has about $1.4 billion in ETF assets, and is one of the fastest-growing ETF model portfolio managers. Bernstein will be speaking at the upcoming Inside ETFs conference in late January in Florida, and he offers here his best investment ideas for 2017, including his first-ever foray into gold.
ETF.com: At the upcoming Inside ETFs, you’ll be offering ideas of where to invest in 2017. Can you give me a preview of your outlook for next year?
Richard Bernstein: The fundamentals in the U.S. economy, and subsequently in the global economy, have been improving all this year. The market troughed in February, because of several things: No. 1, the profit cycle was troughing in the U.S. It looks like the worst of the profit recession was in the fourth quarter of 2015. Inflation expectations actually started to go up as well. They, too, troughed back in February.
So we've had a backdrop of gradual improvement in the fundamentals supporting the U.S. stock market. Subsequently, it began to spread around the world. Inflation expectations have also troughed in the U.K. largely because of Brexit and the weak pound. They've troughed in Germany, and they're stabilizing in Japan. So there's a change going on in the global economy that most investors are completely unaware of.
Couple that with the post-election reaction. A lot of people have asked why the stock market reacted the way it has, but honestly, we already had an improving situation. Now, the President-elect is proposing the largest Keynesian fiscal stimulus package since the Great Depression. What's not to like? It's that simple.
What does that mean for 2017? Investors are still very unaware of the improvement in the global economy and the improvement in the U.S. economy. This summer proved my point, where the story in the fixed-income market was “lower for longer.”
I think “lower for longer” will go down in history along with the euphoria for technology stocks in March 2000 and the euphoria for housing in 2007. Nobody said “lower for longer” five years ago. But they decided this summer, finally, it was going to be lower for longer right in the backdrop of inflation expectations troughing.
Although people have rallied to the cyclical cause, there are many fixed-income investors who think this is temporary. They will learn it's not temporary. A year from now, people will appreciate the appreciation in the nominal growth of the global economy—key word here being “nominal.”
ETF.com: Looking to 2017, what sectors do you like?
Bernstein: In our portfolios, we've been overweight since the first quarter in energy, materials, financials and technology. Why? Those are typically the four sectors that do the best as profitability improves. And profitability is improving.
If you look at most sector performance charts, you can do one-month, three-month, six-month, year-to-date—you'll see that it's dominated by cyclicals, yet very few people are embracing the story. We're equal-weight industrials. At the bottom is your traditional defensive sectors—telecom, health care, utilities and consumer staples.
ETF.com: Are valuations a concern? You’ve said before that the popularity of any strategy leads to its demise because valuations spike, and investors end up owning really overvalued names. How do you avoid falling into the overvalued trap?
Bernstein: One of the things that’s scared people away from equities is high P/Es. People have said, “When P/Es are high, your returns have to be low.” That's not always true. Where it's not true is in what's called an “earnings-driven” market.
There have been many earnings-driven markets through time, but it's funny how people think the only way the market can go up is by interest rates falling and multiples expanding. That's not true. That's an interest-rate-driven market, but there're also earnings-driven bull markets.