Steel in the ground: making the case for US infrastructure renewal

US infrastructure is overdue for upgrade. Chronic underspending on roads, bridges, water, energy and senior housing has resulted in an infrastructure unable to withstand the strain of a growing, mobile and ageing population. For the first time in decades, cyclical, secular and structural trends are aligning, which we believe will usher in a period of investment not seen since the Eisenhower administration. We forecast over US$1 trillion in projects that could be built over the next 10 years. In our view, President Trump’s forthcoming infrastructure plan and emphasis on deregulation, combined with the readily apparent economic need, provide the near-term catalysts necessary to open the floodgates.

Brock A. Campbell, James A. Lydotes, William J. Adams – The Boston Company Asset Management, a BNY Mellon company

US infrastructure is overdue for upgrade. Chronic underspending on roads, bridges, water, energy and senior housing has resulted in an infrastructure unable to withstand the strain of a growing, mobile and ageing population. For the first time in decades, cyclical, secular and structural trends are aligning, which we believe will usher in a period of investment not seen since the … read more

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A parting of ways for the US and Europe?

An uptick in Eurozone economic data as well as relative political stability are among the factors most likely to drive a wedge between the performance of the US and European economic blocs in coming months. Recent PMI readings in Europe were far better than expected, with some modest semblance of inflation coming back into the system. The ECB acknowledged as much when at the end of June its President Mario Draghi said the European economy is on the cusp of transitioning from deflation toward reflation.

Meanwhile, other lead indicators in Europe, including GDP growth and earnings revisions, continue to improve driven by cyclical sectors. Despite the recent pullback in oil and commodity prices, cyclical sectors like consumer discretionary and materials have seen strong year-over-year earnings trends as underlying commodity prices remain higher than 12-18 months ago.

Mark Bogar – The Boston Company, a BNY Mellon company

An uptick in Eurozone economic data as well as relative political stability are among the factors most likely to drive a wedge between the performance of the US and European economic blocs in coming months. Recent PMI readings in Europe were far better than expected, with some modest semblance of inflation coming back into the system. The ECB acknowledged as … read more

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US banks ‘ace’ Fed stress tests

In our view, this year’s CCAR[1] process – which all 34 systemically important US banks passed – points the way to a brighter future for the financial services sector.

The results support our belief that the market has been under-appreciating the magnitude of capital return both this year and importantly next year when the new administration chooses their pro-business appointees at the Federal Reserve.

As long-term relative price-to-book ratios in the sector suggest, a whole group of undervalued companies in the sector have good prospects even if only part of the reform package of President Donald Trump gets through.

John Bailer – The Boston Company, a BNY Mellon company

[1] The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to assess whether the largest bank holding companies operating in the United States have sufficient capital to continue operations throughout times of economic and financial stress

In our view, this year’s CCAR[1] process – which all 34 systemically important US banks passed – points the way to a brighter future for the financial services sector. The results support our belief that the market has been under-appreciating the magnitude of capital return both this year and importantly next year when the new administration chooses their pro-business appointees … read more

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AI and a brave new world of investing

The development of AI—computer systems that can think intelligently and learn as humans do—continues to generate global excitement and controversy, while dividing public opinion. Some fear the development of intelligent machines poses a greater threat to humanity than climate change and could even presage the end of the world. Others remain optimistic AI can bring huge benefits to humankind, including the scope to boost productivity, revolutionise the workplace and unleash a new wave of global economic growth.

We have identified an AI investment universe of about US$13.5 trillion, including 750 stocks, mainly comprised of US companies. We point to the potential for increased AI application in areas, such as retail, transportation, healthcare, manufacturing and agriculture. The development and adoption of so-called natural language processing and its inclusion in everyday items such as smartphones will likely drive future market growth.

We are going to places we haven’t gone before, and in doing so, there are some unanswered questions that may come into play on ethical dimensions and how much free will AI embodies in machines and what this is used for. These are topics that will come up more and more as AI becomes a part of our daily lives. The hope is we can exploit the potential benefits of AI and harness them for humankind in a way that fosters not only greater prosperity but also helps us to enjoy a better quality of life

Robert J. Kluchko – The Boston company, a BNY Mellon company

The development of AI—computer systems that can think intelligently and learn as humans do—continues to generate global excitement and controversy, while dividing public opinion. Some fear the development of intelligent machines poses a greater threat to humanity than climate change and could even presage the end of the world. Others remain optimistic AI can bring huge benefits to humankind, including … read more

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Why the time may be right for US financials

Brexit markedly lowered global growth and interest rate expectations. As a result, company managements for US Financials focused on cost-cutting and strengthening their balance sheets. We believe US Financials are the cheapest sector and growing the fastest. During third-quarter earnings season, 76% of S&P 500 companies beat earnings estimates. While the average beat was 5.6%, Financials beat estimates by 8%. Additionally, the third quarter was the first in over a year to show year-over-year EPS growth for the S&P 500, largely due the impressive 13% growth in Financials.

President-elect Trump could add additional fuel to the fire. If he deregulates the Financials sector, it could remove a massive growth overhang. Expansionary policies, like increased fiscal spending, could also encourage rate increases. Financials are largely domestic and would benefit most from corporate tax reform, with estimates that a 20% federal corporate tax rate would drive earnings higher by approximately 18% on average. After undue punishment since the financial crisis, headwinds are turning to tailwinds, and we believe US Financials are fundamentally stronger, undervalued and poised for a comeback.

For more insight into what the next 12 months might hold for investors, please visit the BNY Mellon Markets 2017 special report.

John Bailer – The Boston company, a BNY Mellon company

Brexit markedly lowered global growth and interest rate expectations. As a result, company managements for US Financials focused on cost-cutting and strengthening their balance sheets. We believe US Financials are the cheapest sector and growing the fastest. During third-quarter earnings season, 76% of S&P 500 companies beat earnings estimates. While the average beat was 5.6%, Financials beat estimates by 8%. … read more

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Is the outlook for US financials brighter?

The vote for Brexit markedly lowered global growth and interest-rate expectations. As a result, company managements for US financials focused on cost-cutting and strengthening their balance sheets. We believe US financials are the cheapest sector and growing the fastest. During the third-quarter earnings season, some 76% of S&P 500 companies beat earnings estimates by around 5.6%, Financials beat estimates by 8%. Additionally, the third quarter was the first in over a year to show year-over-year EPS growth for the S&P 500, largely due the impressive 13% growth in financials.

President-elect Donald Trump could add additional fuel to the fire. If he deregulates the financials sector, it could remove a massive growth overhang. Expansionary policies, like increased fiscal spending, could also encourage rate increases. Financials are largely domestic and could benefit most from corporate tax reform, with estimates that a 20% federal corporate tax rate would drive earnings higher by approximately 18% on average. After undue punishment since the financial crisis, headwinds are turning to tailwinds, and we believe US financials are fundamentally stronger, undervalued and poised for a comeback.

John Bailer – The Boston Company, a BNY Mellon company

The vote for Brexit markedly lowered global growth and interest-rate expectations. As a result, company managements for US financials focused on cost-cutting and strengthening their balance sheets. We believe US financials are the cheapest sector and growing the fastest. During the third-quarter earnings season, some 76% of S&P 500 companies beat earnings estimates by around 5.6%, Financials beat estimates by … read more

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Is US shale oil back in black?

US shale oil is attracting billions of investment dollars despite recently emerging from the largest boom-bust in the commodity’s history. For traditional oil projects, the economics remain challenging, and risks loom large. However, US shale producers can quickly add resources with a fraction of the risk, but one US unconventional basin stands above the rest.

Why is Permian (an oil and natural gas geologic basin in southwestern US ) shale outperforming oil and outproducing other shale basins? Permian shale producers benefit from the region’s unique geology and well-established infrastructure. The Permian Basin has several stacked layers of oil due to multiple periods of thriving carbon-based life forms and rising and falling sea levels, geological prerequisites for oil creation. Additionally, these pay zones have risen to the surface and become outcroppings, dramatically increasing our knowledge of their production potential.

For many years, the Permian Basin functioned as a conventional oil field. Now, shale provides additional, meaningful life for this basin. Since shale uses similar services as conventional drilling, the necessary infrastructure is already in place for drilling and extracting, allowing companies to quickly and efficiently increase production.

The combination of geography and infrastructure makes the Permian Basin a unique shale play and strategically important to the portfolios of energy producers. Permian oil rigs are on the rise, while rig counts in Eagle Ford and Bakken Basins are plateauing. We expect other plays to recover soon, but investment dollars will pile up higher in West Texas. Despite a modest premium to peers, we believe the Permian Basin represents enormous value with multiple pay zones driving many years of growth and infrastructure in place to develop it.

Robin Wehbé – The Boston Company, a BNY Mellon Company

US shale oil is attracting billions of investment dollars despite recently emerging from the largest boom-bust in the commodity’s history. For traditional oil projects, the economics remain challenging, and risks loom large. However, US shale producers can quickly add resources with a fraction of the risk, but one US unconventional basin stands above the rest. Why is Permian (an oil … read more

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How millennials are changing food industry choices

Changing US consumption patterns are forcing big change in the food industry. Millennials don’t tend to eat three square meals a day like their parents. Millennials graze, often eating just one meal a day, supplemented with three to four nutritious snacks. This new way of eating favours small local food companies whose brands emphasise quality ingredients and sell through non-traditional channels with higher ‘snack occasion’ penetration.

Large companies are slowly responding. Some snacking leaders are launching new products, such as plant-based chips and nut snacks and repositioning ad campaigns to stress ingredient quality. Other companies have resorted to small bolt-on acquisitions to meet these consumer demands. However, most large-scale food companies acknowledge their inherent disadvantages on this new playing field and are focusing more on margin management to grow earnings. Some also view large-scale consolidation as a way to facilitate this margin strategy. Time will tell if these changes are durable and if larger snack manufacturers can adapt.

David Sealy, The Boston Company Asset Management, a BNY Mellon Company

Changing US consumption patterns are forcing big change in the food industry. Millennials don’t tend to eat three square meals a day like their parents. Millennials graze, often eating just one meal a day, supplemented with three to four nutritious snacks. This new way of eating favours small local food companies whose brands emphasise quality ingredients and sell through non-traditional … read more

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Have emerging markets hit peak value?

Over the past five years, emerging markets have gone from being universally loved to the target of broad scepticism. Over that period, the commodity super-cycle has collapsed, domestic growth has deteriorated and currency pressures have grown. As a result, EM equities have underperformed versus their developed-market counterparts.

However, we believe the long-term investment case for emerging markets could remain compelling, underpinned by favourable demographics, greater development upside, and the potential for continued GDP per capita catch-up vs. developed markets. This demographic dividend, coupled with ongoing infrastructure development, efficiency and productivity gains, and a growing middle class, remains an attractive structural growth story that can withstand periodic cyclical downturns.

Historically, investors have been rewarded for allocating to the asset class after long periods of poor performance coupled with attractive valuations. With a lot of bad news priced in, even a stabilised US dollar environment and modestly higher commodity prices could spark a meaningful improvement in emerging markets’ corporate earnings profile.

As the recovery unfolds, we view the value-oriented areas of the market as the key beneficiaries. Improvements in export competitiveness, capex discipline, M&A and political reform serve as an appealing complement to the valuation opportunity we see in the asset class today.

C. Warren Skillman and William J. Adams – The Boston Company Asset Management, a BNY Mellon company

Over the past five years, emerging markets have gone from being universally loved to the target of broad scepticism. Over that period, the commodity super-cycle has collapsed, domestic growth has deteriorated and currency pressures have grown. As a result, EM equities have underperformed versus their developed-market counterparts. However, we believe the long-term investment case for emerging markets could remain compelling, … read more

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Winds of change: a big leap forward for renewables

Between 2004 and 2014, renewable energy’s share in Europe doubled from about 8% to 16%, and it is still growing. We are nearing a tipping point, and in certain niches, we believe wind power has significant potential to disrupt the traditional energy market.

As a percentage of all incremental future electric capacity, wind power is taking a big leap forward from a small base.  At the same time, its cost base has fallen, making wind power increasingly competitive with coal and gas in many markets, even on an unsubsidised basis.  (In fact, it is directly competitive at generation, but loses some efficacy once the costs of backup and grid connections are factored in.)

Setting aside the recent drop in commodity prices, the costs of wind power are declining more rapidly and more sustainably than conventional power. In addition, clean air standards are driving widespread adoption, regardless of whether wind power costs a penny or two more.

Mark Bogar and Andrew Leger – The Boston Company Asset Management, a BNY Mellon company

Between 2004 and 2014, renewable energy’s share in Europe doubled from about 8% to 16%, and it is still growing. We are nearing a tipping point, and in certain niches, we believe wind power has significant potential to disrupt the traditional energy market. As a percentage of all incremental future electric capacity, wind power is taking a big leap forward … read more

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