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September 2018

Equity Market Overview and Sector Highlights

About Janus HendersonU.S.-Based Sector Research

� Six analyst-led teams: Consumer, Energy & Utilities, Financials, Health Care, Industrials & Materials, and Technology

� Average tenure of nine years at the firm and 16 years of financial industry experience as of 6/30/18

� 940 stocks covered across market capitalizations, styles and geographies as of 6/30/18

� Fundamental, independent research that seeks to identify best ideas in each sector

� Stocks with strong-buy or buy ratings considered for inclusion in Janus Henderson equity strategies

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U.S. Stocks ShineMarket history is defined by milestones, and in recent months U.S. stocks have been hitting many. In August, the S&P 500® Index reached a record high and, by some measures, entered the longest bull market in the Index’s history. Shortly thereafter, the Nasdaq Composite crossed 8,000 for the first time. Meanwhile, Apple’s market value exceeded $1 trillion, a feat never before achieved – until Amazon did it a month later.

These milestones stand out all the more when compared to the performance of many non-U.S. markets. This year, a strong dollar, trade tensions and geopolitical concerns in Argentina, Turkey and Venezuela have weighed heavily on emerging markets, pushing the MSCI Emerging Markets IndexSM near bear market territory.1 In Europe, the election of a populist government in Italy, the continued specter of Brexit and troubling fiscal policies have caused stocks there to also fall.

Even within the U.S., performance has diverged. Although earnings growth has been strong across most sectors, growth stocks have trumped value and small caps have beaten large-cap peers. What’s more, performance has tended to concentrate in select industries, including consumer Internet, medical technology and Software as a Service (SaaS).

Innovation and Tax Reform Drive ReturnsAt first blush, this narrowing of returns may be unsettling. But we believe there are sound reasons behind the concentration. For one, the Tax Cuts and Jobs Act (TCJA) passed at the end of 2017 set off a round of remarkable earnings increases for U.S. companies. The legislation lowered the federal corporate tax rate from 35% to 21%, providing firms that do most of their business in the U.S. – which includes a large number of small-cap companies – a significant windfall. In addition, we are in a period of rapid innovation, with many small caps incubating “the next big idea.” Many of these firms have high growth potential.

Meanwhile, at the top of the food chain, enormous oligopolies are forming, especially in technology. These firms may have fewer domestic revenues benefiting from a lower corporate tax rate. But the TCJA also reduced the cost of repatriating corporate savings held overseas, and companies are taking advantage: During the first quarter, U.S. multinationals brought back $313 billion in offshore savings, or roughly 30% of the total estimated cash held abroad, according to the Federal Reserve. Companies are using the newfound money to buy back shares or increase dividends, creating a strong floor for valuations. Furthermore, many large-cap firms are innovating, using their considerable revenue growth and repatriated earnings to make acquisitions, invest in new technologies and win customer loyalty. In our opinion, these investments are helping create enduring business models that will be hard to supplant.

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Key Takeaways

� U.S. stocks have set new records, while a strong dollar, geopolitical concerns and trade tensions have weighed on emerging markets and Europe.

� Within the U.S., growth has outperformed value and small cap has beaten large cap, as companies within these categories tend to be innovators and/or beneficiaries of U.S. tax reform.

� Going forward, we believe firms that continue to innovate or invest in new technology to win customer loyalty will be market leaders.

1A bear market is defined as a fall of 20% or more from a benchmark’s recent peak.

Opportunities Beyond the Top PerformersIndustries such as consumer Internet and SaaS are causing significant disruption to the economy, helping drive the outperformance of these stocks. But we believe growth opportunities exist across sectors and geographies. A strong U.S. economy and tax reform are leading to a rise in capital expenditures (capex), which we think will benefit industrial firms exposed to the capex cycle. Within the consumer sector, some firms are investing in technology to help manage inventory, streamline distribution and connect directly with consumers, all of which is starting to result in improving sales. In Europe, contracting

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Technology: Room to RunDespite recent outperformance, large-cap technology stocks still trade near their long-term average as many tech companies increase market share and grow earnings.

Source: Bloomberg. Data as of 6/30/18Note: P/Es are quarterly and based on forward 12-month earnings estimates for the S&P 500 Index technology sector.

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multiples have pushed up dividend yields, while multinational firms are delivering positive earnings growth thanks to healthy global demand. Plus, the continent is much earlier in its economic recovery than the U.S. Should political concerns lift, Europe could potentially have a long runway of growth ahead of it.

In other words, equities could continue to grind higher, with even more industries and geographies benefiting. Trade disputes, a strong dollar and macro-political issues remain risks. But we think the secular tailwinds from tax reform and ongoing innovation will outweigh these headwinds in the long run and lead to potentially more positive milestones for stocks.

Carmel Wellso Director of Research

Consumer

Healthy Retail SalesLow unemployment, rising home prices, tax reform and a strong stock market are helping boost consumer confidence. In turn, retail sales have accelerated this year, climbing a healthy 5.5% for the first seven months compared with the same period in 2017. Even traditional brick-and-mortar establishments are feeling the benefit, with same-store sales for many retailers rising at a healthy clip. However, some of the biggest jumps occurred at companies that have made significant investments in digital and e-commerce capabilities, a trend that could become amplified over time. And while the National Retail Federation raised its 2018 forecast for retail sales, the group also noted that trade tariffs could dampen consumer enthusiasm.

Investment ImplicationsWe are monitoring the pace of consumer spending and whether e-commerce investments such as buy online/pick up in store help drive traffic into stores. In general, we continue to favor companies that are proving to be net beneficiaries of the digitization of the global economy, whether because their business models are on the right side of today’s technological disruption or because they are using technology to create better customer experiences. Among legacy retailers, companies with scale and forward-thinking management could be better positioned to compete in e-commerce than smaller firms late to invest in technology.

Energy & Utilities

Positive Supply and DemandThe supply/demand environment for oil remains constructive, thanks to infrastructure constraints in the Permian Basin, relatively low levels of spare capacity among members of the Organization of the Petroleum Exporting Countries, continued pressure in countries like Venezuela and fewer oil exports from Iran. At the same time, a healthy global economy is fueling demand, which is expected to grow by an average of 1.4 million barrels per day (bpd) in 2018 and 1.5 million bpd in 2019. As a result, many exploration and production (E&P) companies have increased capital expenditures (capex), causing some investors to worry that firms are straying from the path of capital discipline. The incremental spend has been beneficial for some parts of the oil supply chain, such as midstream operators, but less so for oil service firms, whose business has slowed as a result of logistical bottlenecks and rising input costs.

Investment ImplicationsWe believe oil prices will remain range-bound – from about $60 to $70 a barrel for West Texas Intermediate and $65 to $75 for Brent – with the potential to move higher in light of supply/demand fundamentals. Higher capex is a trend worth monitoring, but we continue to find disciplined E&Ps that are increasing spending without impairing shareholder returns. In our opinion, fundamentals for refiners remain solid, but the stocks’ valuations look expensive, while excess capacity will likely stay a headwind for oil service companies in the near term.

Financials

Growth Opportunities ContinueAfter a strong start to the year, financials have broadly lagged the U.S. equity market, weighed down in part by the relative underperformance of value stocks and a declining 10-year Treasury yield. However, earnings growth for the sector generally remains strong,

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driven in part by ongoing benefits from U.S. tax reform and expectations that the Federal Reserve will continue with measured interest rate hikes. In addition, secular tailwinds such as the digitization of global payments and retail financial services are helping propel some stocks.

Investment ImplicationsWe continue to look for companies with strong competitive advantages, structural growth prospects, high or improving returns, and good management teams. One area where we are finding such opportunities is digital payments. Globally, electronic payments are growing at a faster rate than the world’s nominal GDP as credit and debit cards, electronic transactions, and mobile payments take market share from cash and check. As a result, we are finding attractive investment opportunities across a range of payment companies. These include global networks, whose scale and ubiquity drive core payments products, as well as value-add in areas such as safety and security, and data. Also included are payment processors, which are driving strong growth by facilitating e-commerce and more closely integrating with merchant software platforms.

Health Care

Easing Regulatory Concerns Although the debate over drug pricing continues, pharmaceutical and biotechnology stocks have started to rebound as regulators focus on the drug-supply chain, not manufacturers. The White House’s “blueprint” for lower drug prices, for example, would require pharmacy benefit managers to share drug rebates with consumers at the point of sale, a move that would likely have little impact on the net price realized by drug makers. Overall, many companies are increasingly focused on developing products and services that provide value to the health care system. Firms are also restructuring to improve efficiencies or capture new sources of growth, as evidenced by recent consolidation within the sector.

Investment ImplicationsWe think pharmaceutical and biotechnology valuations have become more attractive because of the regulatory overhang, especially as drug pipelines improve and scientific breakthroughs continue. As a result, we continue to favor firms focused on developing therapies that meet unmet medical needs or improve efficiencies within health care. On the other hand, we are avoiding companies that we think could see their pricing power or growth limited because of regulation or that could be at risk of being disenfranchised from the way consumers access medical care.

Industrials & Materials

Strong End MarketsHigher prices for steel, oil and other raw materials continue to put pressure on profit margins for some industrials while the strengthening dollar has become a headwind for the sector’s multinational firms. However, we believe many industrial firms should be able to offset rising materials costs with price increases in the coming year. Meanwhile, end-market demand remains robust as areas such as mining and agriculture continue to rebound from their 2015 downturn. Higher oil prices have also been a positive for the sector since a meaningful portion of the industrial manufacturing and production complex is tied to energy.

Investment ImplicationsWe think firms with strong brands or differentiated products are best positioned to raise prices and defend profit margins. Cyclical industrials are also likely to benefit from the economy’s continued expansion while sustainably higher oil prices could drive growth at companies that sell products to refiners, producers and other firms in the oil-supply chain. At the same time, we favor industrials that we think could benefit from new, long-term growth opportunities for the sector, such as factory automation and machine vision.

Technology

Short-Term HeadwindsTechnology firms continue to benefit from secular growth trends, but the sector also faces short-term headwinds. Chief among them is the ongoing trade dispute between the U.S. and China. With semiconductor, hardware and supply-chain firms exposed to global trade, these stocks have declined as investors worry about the growing list of goods now subject to tariffs. Another headwind is data privacy and security: With more stringent privacy regulations recently enacted in Europe and worries rising about data breaches, investors have become increasingly concerned about the amount of capital that tech firms will have to spend to protect their platforms.

Investment ImplicationsAlthough we are closely monitoring the rollout of tariffs, we believe the U.S-China trade dispute has made valuations of affected companies more attractive. We also think tariffs will have a limited impact to bottom lines, as most tech manufacturing is done outside of China. Finally, we believe capex on security, as well as powerful trends such as the Internet of Things and cloud computing, will drive demand for processing power, benefiting firms such as semiconductors.

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Josh Cummings, CFA Consumer | Research Analyst | Sector Lead

Andy Acker, CFA Health Care | Portfolio Manager | Research Analyst | Sector Lead

John Jordan Financials | Portfolio Manager | Research Analyst | Sector Lead

Noah Barrett, CFA Energy & Utilities | Research Analyst | Sector Lead

Ethan Lovell Health Care | Portfolio Manager | Research Analyst

Jon Bathgate, CFA Technology | Research Analyst | Co-Sector Lead

David Chung, CFA Industrials & Materials | Research Analyst | Sector Lead

For more information, please visit janushenderson.com.

The views presented are as of the date published. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. No forecasts can be guaranteed. Opinions and examples are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to changes in market or economic conditions. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value.In preparing this document, Janus Henderson has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources.This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.Janus Henderson is a trademark of Janus Henderson Investors. © Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited, Henderson Global Investors (Brand Management) Sarl and Janus International Holding LLC.C-0918-19369 09-15-19 188-15-14919 09-18