As always, I hope this note finds you doing well.
Investment returns were simply fantastic in 2017. Below, you will find the link to our annual forward outlook on equity returns, corporate earnings, yield/bond markets, volatility (or lack thereof), and a primer on Bitcoin. I fully recommend taking a look at the complete report; however an executive summary has been provided below for your convenience.
We appreciate your interest in Forest Capital and Sixty Guilders Research.
Happy New Year.
Full Report: 2018 Outlook Report - Strolling Through the Tulip Fields
Our base case outlook for 2018 is for the equity market to post a high-single digit/low double digit total return, in line with its long term historic average.
Street earnings expectations call for a solid 15% gain, as companies are benefiting from a synchronized global economic expansion, reduced regulatory burden, and expectations for lower corporate tax rates that ought to benefit low-levered corporations. Adding a roughly 1.8% dividend yield (for the S&P 500), and some give back in P/E multiple, puts our total return expectation for equities at around 10% for 2018.
We also expect high yield to underperform from current levels, as investors look for higher risk adjusted returns in equities and other assets. This “risk on” outlook we believe sets the stage for a potentially much more volatile financial markets as the year progresses.
Given the backdrop of full valuations and low volatility, we believe that in order to outperform beyond just this one year ahead, we will have to focus more on avoiding the pretty tulips that everyone is bidding up, and instead seek value among the weeds of the less followed paths of hybrid securities, old economy companies, and solid balance sheets.
As usual, thank you for investing with Forest Capital! For additional information on portfolio positioning, please contact Forest Capital directly at email@example.com.