Looking ahead, the markets may be moving toward a boom cycle after producers slashed capital expenditures in response to falling prices in 2014 and 2015, which may limit supply and bolster pricing. The capacity cuts have primed the markets for potential supply and demand imbalances. Meanwhile, global economies continue to strengthen and would renew demand for raw materials.
Bruno also argued that commodity producers may be another opportunity as many trade at lower multiples to the market than historical averages, adding that “being long equity commodity producers may be a good way of implementing this theme into an investment portfolio.”
Delving into the current market conditions, Mark Lacuesta, Director of Index Strategies for IndexIQ, outlined the potential implications of the Trump tax reforms on the markets. The reduction of the top corporate tax rate from 35% to proposed 20% by both chambers of Congress will cut the overall tax burden of U.S. companies.
“As currently written, we believe investors in U.S. equities may benefit from the effects of proposed changes to corporate taxes,” Lacuesta said.
Additionally, the adoption of a territorial tax system and the reduction of the Cash Repatriation rate from the currently high 35% will entice off-shore cash to return to the U.S. Lacuesta argued that the repatriation cash holiday would be particularly beneficial toward large-cap companies, pointing out 76% of large-cap companies derive a portion of their revenues outside of the United States compared to only 57% of small-caps.
The tax reforms could translate to greater value for shareholders. The additional cash could fund share buy-backs or special dividend payout to shareholders. In addition, the cash can be used toward corporate expansion or capital expenditure investment to increase working capital or invest in equipment to expand capacity or productivity.
Lacuesta warned that the tax reform could lead to additional rate hikes. Nevertheless, small-caps could stand to benefit in this type of environment.
“We believe small caps are geared toward growth and will benefit in a rising economy,” Lacuesta said. “Small cap stocks have historically outperformed during rising rates.”
ETF investors seeking a way to target the growth potential of small-caps and a smart beta strategy to diversify risks may look to the IQ Chaikin U.S. Small Cap ETF (NasdaqGM: CSML), which tries to reflect the performance of the Nasdaq Chaikin Power US Small Cap Index. The underlying index incorporates the so-called Chaikin Power Gauge that combines four primary factors, including value, growth, technical and sentiment.
Financial advisors who are interested in learning more about trends and insights to look for in 2018 can watch the webcast here on demand.