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Which US Sectors Look Appealing in the Reflationary Environment?

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Dec. 2 2016, Published 10:59 a.m. ET

Blackrock

Against this backdrop, we are cautious of long-duration bonds and favor Treasury Inflation Protected Securities (TIPS). We see equities as attractive but expect lower returns ahead amid rising policy uncertainty. We expect cyclical and value equities (particularly financials and miners) to outperform, health care stocks to benefit under a Trump administration, and the U.S. dollar (UUP) to strengthen.

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Market Realist

Can cyclical and value equities outperform?

As we discussed in Part 1 of this series, deflation can be bad for stocks. To stop the economy from going into deflation, reflationary measures are sometimes necessary. Various cyclical and value stocks—such as the financials sector (XLF) (IYF), the healthcare sector, and miners (XME)—are expected to outperform after Trump’s surprise win. The chart above shows how miners, as tracked by the SPDR S&P Metals and Mining ETF (XME), have recorded a tremendous increase this year. The financial sector is also expected to recover from its earlier losses, owing to a rising inflation rate and a steep yield curve.

How can financials benefit?

Most US bank stocks rose on November 10 after Trump’s official transition website stated, “The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.” Big banks like Wells Fargo (WFC) rose 7.5% while JPMorgan Chase (JPM) and Bank of America (BAC) rose 4.6% and 4.4 %, respectively, on November 10.

The BlackRock Institute, in a post in November, stated that US regional banks (IAT) could be a good opportunity in the current environment. These banks could grow faster on the back of proposals to reduce regulatory burdens, returning value to shareholders.

What about Trump’s healthcare reforms?

Trump’s administration plans to revive the healthcare sector (XLV) (IYH) as well. On November 10, Trump’s transition team stated that they will work to repeal the Affordable Care Act (or ACA). His health plan would include replacing the ACA with Health Savings Accounts. As per the plan, “The Administration’s goal will be to create a patient-centered health care system that promotes choice, quality, and affordability with health insurance and healthcare, and take any needed action to alleviate the burdens imposed on American families and businesses by the law.”

In the final part of this series, we’ll discuss how Trump’s trade deal policies could affect export-driven emerging markets.

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