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Global Sector Views Report

A sector-by-sector outlook from the Janus Equity Team

For four decades, fundamental,

bottom-up research has been at
the core of the Janus investment
process. Our deep team of
analysts covers approximately
1,500 stocks around the globe.
Each takes a do-it-yourself,
unconstrained approach to
research. We believe this
differentiates us from our peers
and drives results for our clients
and the investors they serve.
Every quarter, our seven global
sector teams share their bottom-up
perspective on key themes in the
equity markets and how those
themes impact their sectors and
areas of coverage.

> Communications
> Consumer

Energy + Utilities

> Financials



Health Care



Industrials + Materials





2 | Global Sector View

The opinions are those of the authors as of June 2016 and are subject to change at any time
due to changes in market or economic conditions. The comments should not be construed as a
recommendation of individual holdings or market sectors, but as an illustration of broader themes.

The Summer of Our Discontent

Once again, summer comes with volatility out of Europe.
The 43-year marriage between the UK and its continental
neighbors moves to a messy and long divorce negotiation
with a lot of assets at stake.
On the day the Brexit results were announced, global equities
shed a remarkable and a record $2.1 trillion in value,
only to climb back in the final days of June. The fall and
subsequent bounce likely presage a volatile summer for
stocks and many other asset classes. Beyond the uncertainty
in the UK and on the continent, as the currencies and stock
markets weaken, Brexit has implications for China and Japan,
and for U.S. companies sensitive to a stronger dollar. We see
an environment where portfolios that have lower exposure to
volatility and a lower beta should hold up on a relative basis.
In the last year, more volatile stocks have been exceptionally
poor contributors for active investors.
Brexit is another sign that populism is taking hold of the
electorate, many of whom suffered in the global financial
crisis and feel that they havent fully participated in the
recovery. Mildly improving economies and healthier sovereign
balance sheets are slim comfort to many who are struggling
to regain a pre-crisis standard of living.
Against the economic backdrop, along with the migrant crisis
and specter of terrorism, which are unfairly linked, we may
see additional political turmoil leading market disruption. It is
easier to leave the EU than to leave the euro, but the rise of
populist parties in Europe suggests we may see calls for both
in the coming months. Many key European elections happen
over the next year.
Step back from the politics, however, and the picture improves.
Consumer confidence and activity is generally holding up.
Companies once again have flush balance sheets. While they
are cautious on expansion capital expenditures, companies
are using cash to buy shares or pay dividends. Several of the
key issues from earlier this year seem less vexing. Oil has
recovered and China seems to be on a more certain path.
Federal Reserve policy remains tough to foresee, however,
but should be data dependent. A rate hike, therefore, might
be a strong signal of economic strength and therefore
positive for equity markets.
For active investors, the key is to try to hold the line during
this period of volatility. We do not think that it is a time to try
to run to defensive stocks or to broaden a portfolio so much
that it solely mimics an index. It is too difficult to predict when
markets calm and fundamentals matter more. The last several
years have been conducive for passive investing. A defensive
market can penalize active investors, especially those with a
growth bent or who own smaller than average companies.
When markets calms, active investing can recover.

Certain sectors can hold up better, and we highlight our sector

views in the following pages. The outlooks for technology and
health care have not changed much with the Brexit vote. The
shift to the cloud and the challenge to legacy tech companies
carry on and provide attractive investment opportunities.
The innovation of medicine and the demographic shifts we
have often discussed remain. Both sectors are cheaper
following the turmoil but no less attractive. Other sectors
face a tougher row. Financials, which fell stunningly following
Brexit, face the difficult problems of challenging economic
conditions, corporate uncertainty about borrowing, negative
interest rates and shrinking margins. UK banks also must
endure an uncertain regulatory environment. Industrials could
struggle with a strong U.S. dollar and weak global markets.
The road of crisis seems a little too well traveled lately.
Whether Brexit is like Cyprus a noisy event with few longterm implications or like Lehman which sparked a global
panic with ripples still touching us today remains to be
seen. Our leaning is toward the former but it doesnt mean
the summer wont be tough for equities. Active equity could
struggle more in the near term because it is typically less
exposed to large cap, to yield and to defensiveness overall
than most indices. Longer term, the importance of growth and
innovation should matter more in a sluggish global economy.
Our focus on these companies is not changing.
If the summer of our discontent is made glorious, therefore, it
will be because investors focus on better fundamentals and
ignore the political uncertainty. We recognize the fragility of
the economic recovery and the stretched policies of central
banks, but our base case remains positive on equities. In
previous periods of market pique, defensive environments
gave way to stronger equity markets that favor active
managers with a tolerance for volatility, growth and higher
than average multiples. Our vote (and our money) goes there.

Carmel Wellso
Director of Research

Adam Schor, CFA

Director of Global Equity Strategies

Global Sector Views from the Janus Equity Team | 3


Opportunities & Trends

> Mobile e-commerce and advertising have become mainstream. We hit an

inflection point in the second half of 2015, and mobile search and advertising revenues
have since become even more pivotal drivers of revenue growth for Internet companies.
> Social media is becoming a hub for original content development and discovery.

Entertainment content is being shared with greater frequency. Creators are seeking
new ways to develop content for this medium and participate in the monetization
derived from it.

We anticipate an
increase in new
pay-TV products
and service
bundles as we
exit 2016.

> We anticipate that there will be an increase in new pay-TV products and service

bundles as we exit 2016. The integration of existing pay-TV and digital content will
create opportunities for both new and existing providers to add value and differentiate
their offers. While we expect increased competition, we also expect legacy distributors
that have invested in additional content rights, better navigation tools and enhanced
network services will be able to gain market share with the highest-value customers.
> We expect the next wave of advertising growth to be driven by effective data

analytics across a range of distribution platforms. As these capabilities grow,

brands and agencies will be able to measure in a standardized manner returns
across delivery platforms, thus enabling campaigns to reach the right audience on the
right platform and be priced in a manner that provides increased value to advertisers
and media owners.

Risks & Headwinds

> It is unclear how existing distributors will be impacted by the increased product

offers and service bundles.

> The shift in television viewing is happening faster than distributors and content

companies can develop advertising and measurement models around it. More
content than ever will be viewed, but this will occur across a range of platforms,
rendering existing business models less effective. Future advertising revenues for
content companies are harder to predict.
> Despite the large reach of social media, content on these channels lacks the

duration of traditional media, which is a prerequisite in attracting advertising time.

Investment Implications
> We like Internet service companies with dominant digital advertising platforms.

Large platforms benefit from a positive feedback loop. The scale of their platforms
creates enriched customer data that should add more value for the consumer and the
advertisers seeking to better understand the viewing and consumption habits.
> Given the demand for analytics to compare advertising campaigns across

platforms, we are investing in companies that are tackling this challenge. It also
helps inform the media we own.
> Among pay-TV distributors, we prefer companies that can package multiple

services with their robust broadband offerings and are investing in technology
that enhances the value of the content bundle to consumers. We like the
heightened new product development in video services that is leading to greater
consumer choice.

4 | Global Sector View

Share of Viewers Time Spent in Channel vs. Share of Advertising Dollars













Time Spent




Advertising Spending

While now commanding 25% of viewing time,

mobile dramatically lags in ad spending
allocated toward it.

Source: Interactive Advertising Bureau, KPCB Internet Trends 2016; U.S. Market 2015.

Global Sector Views from the Janus Equity Team | 5


Opportunities & Trends

> The focus of the consumer on experiences over things remains, and the gap

has only widened. The change has been fueled, in part, by social media enriching
experiences as these platforms facilitate greater sharing.
> U.S. home improvement spending and car sales continue to grow at a strong

pace. Rising home values are encouraging households to invest in home improvement
projects they delayed after the 2008 financial crisis. These purchases tend to be late
cycle, as consumers are more apt to use credit on such items.

Mobile ordering
and loyalty
programs are
increasing in

> The popularity of mobile ordering and loyalty programs at restaurants is

increasing. It creates opportunities for these companies to gather more data on their
customers, which can translate to targeted ad campaigns and additional purchases.

Risks & Headwinds

> The shift toward e-commerce sales is accelerating. Foot traffic in malls is

steadily declining. The price transparency from mobile and online shopping hurts
a number of apparel and retail companies. These companies are being forced to
make large investments to improve the multi-channel shopping experience, and such
expenditures stand to squeeze margins over the near term.
> Amazon presents challenges to legacy brick and mortar stores. The company

continues to gain market share, and its free shipping policies are putting further
pressure on its competitors profitability. Physical retailers continue to suffer from
excess capacity as companies have been hesitant to cede market share. This has
acted as a weight on margins.
> The deflationary environment in Europe continues to be a headwind. Luxury

purchases have also been hampered, to a certain degree, by terrorism-related activity

weighing on tourism.
> The smaller market for physical goods has created a headwind for these stores

margins. Smaller footprints reduce these companies economies of scale, especially

with regard to purchasing and inventory management.

Investment Implications
> We prefer consumer discretionary companies that are less impacted by the

migration toward online and mobile sales. Many of our companies sell products
that require a consultative sale, or are too large to ship.
> Given the growing preference for e-commerce, we are avoiding mall-based

apparel retailers, especially companies that dont sell their own brands. Lower mall
traffic has also led to a decrease in spontaneous purchases.
> The potential for sector consolidation may result in optionality on certain stocks.

While several pockets of the sector suffer myriad headwinds, some companies have
attractive assets that may command a premium to existing stock prices should a wave
of consolidation commence.

6 | Global Sector View

Starbucks Loyalty Program Membership (U.S.)


Members (Millions)









Loyalty Customers

Average growth over the past five years of 27% is

all the more valuable given that program members
are three times more likely to make a purchase.
Source: Starbucks.
*Compound Annual Growth Rate

Global Sector Views from the Janus Equity Team | 7


Opportunities & Trends

> Our expectation of equilibrium returning to oil markets in 2016 has occurred

more quickly than anticipated. While the curtailment of North American production
which we foresaw has been a factor, other supply-side developments have also
contributed to rationalization. Fires in Canadas oil sands and unrest in Nigeria have
taken a substantial level of production offline.
> Despite these supply shocks already pushing the price of crude toward $50 per

supply and tepid
global demand
should keep oil
prices rangebound for much
of the remainder
of the year.

barrel, we maintain our view that prices will be bound between $50 and $60 for
the remainder of 2016.

Risks & Headwinds

> Crude prices, at present, do not appear to have significant upside. With North

American shale companies being marginal producers, we expect near-term prices to

be capped around $60 per barrel as these companies can quickly bring idled wells
online. Another risk to pricing is Iranian production continuing to enter the market
more quickly than projected.
> Demand remains a risk. Energy use is tied to global economic growth, especially

as much incremental demand has come from inefficient emerging-market users.

A worse-than-expected slowdown in China would weigh on industry prospects, as
would recession in the U.S.
> Midstream operators are at risk of slowing North American supply. A business

model geared toward volume-based revenue insulated energy transporters and

storage providers, to a certain degree, as prices declined during 2014 and 2015.
Lower volumes associated with reduced demand may place pressure on these
companies earnings prospects.

Investment Implications
> As equilibrium returns to North American markets, we view larger service

companies as advantaged over smaller peers. These companies had the financial
strength to maintain equipment and capital expenditure (Capex) during the downturn,
which now enables them to more rapidly meet the needs of drillers. Halliburton, which
focuses on North American production, is one company that we view as especially well
positioned to maintain or gain market share.
> Seasoned management teams matter. The downturn exposed which companies

could effectively allocate capital and manage balance sheets. Some producers
resisted the temptation of raising additional equity, which would have diluted existing
shareholders. Disciplined companies are also likely to use the upturn to reduce debt
and judiciously increase production.
> Contrary to prevailing sentiment, we see potential value in large-cap E&P

companies. It may seem that these companies are thwarted by having committed
to capital-intensive oil sands or offshore projects. Development expenses, however,
are being disbursed in a deflationary environment, meaning the initially projected
returns on capital may not be far off the mark. We have identified opportunities to gain
exposure to long-life, slow-declining assets that have benefited from a lower-thanprojected Capex environment.

8 | Global Sector View

U.S. Crude Production off Recent Highs


1,000 Barrels / Day

















5-Year Range

Production rationalization in the face of a

weak pricing environment is finally being
reflected in recent supply data.
Source: U.S. Department of Energy, Bloomberg.

Global Sector Views from the Janus Equity Team | 9


Opportunities & Trends

> The sell-off in global banks sparked by the UKs decision to exit the EU has

Improved data
and analytics

resulted in a stubbornly high intra-sector correlation. While recent developments

are negative for financials, we recognize that the global financial architecture has
become more robust since exiting the global financial crisis and European sovereign
debt crisis and that bank balance sheets are better capitalized and enjoy much stronger
liquidity positions. Despite this, many banks especially in Europe trade at valuations
which imply imminent crisis. This scenario is possible if political disunity raises
redenomination risk once again, but that is not our base case.
> The prospects of financial data providers have increased. As the volume of data

collected by companies has grown, the breadth and quality of the analytics provided
has improved as well. Such data are in high demand for functions such as trading,
execution, index construction and risk management.

represent a
for financial

Risks & Headwinds

> Subdued global growth prospects and low-to-negative interest rates remain a

drag on the sectors prospects. Consequently, consensus earnings forecast have

been dialed back over the past few months and sharply post Brexit, which dropped
global rate curves. Tepid economic growth has weighed on loan growth, and low rates
maintained downward pressure on banks net-interest margins, a key profitability metric.
Not only are the BOE and ECB in no positions to raise rates in the wake of the Brexit
referendum, we doubt the Fed has appetite to raise rates at least until 2017.
> Retrenchment within previously lucrative investment-banking businesses limits

earnings growth. Early-year volatility curtailed new securities offerings. We expect

that additional flare-ups may lead to a similarly weak environment. Secular pressures
namely a vast increase in regulations have also impacted these business lines, as has
market illiquidity, which has been acutely felt in fixed income trading.
> The green shoots of credit growth that we have identified in European banks

will likely stall as the lack of clarity on an exact path forward for the UKs exit will
disincentivize long-term investment.

Investment Implications
> While we remain extremely cautious on European banks, we believe that core

northern European banks with retail operations and pricing power represent the
most attractive method to maintain exposure to the sector within the region.
> The ongoing transition to electronic payments, in our view, remains one of the

more attractive spaces in financials. Among our largest holdings within the sector
are companies that we believe stand to benefit from growth in electronic payments and
private-label credit cards. The latter segment has the potential to be especially accretive
for businesses given the associated ability to collect data and build customer loyalty.
> We believe that global insurance companies represent the most attractive

exposure to secular demand growth from Asian customers. Well-recognized

brands, breadth of products and management expertise will place multinational
providers at a competitive advantage versus their regional peers.

1 0 | Global Sector View

Net Interest Margin Trends of Major U.S. Banks






Citigroup, Inc.

JPMorgan Chase


Wells Fargo & Co.

Bank of America

As short-term interest rates

have remained low, margins at
U.S. banks have been squeezed.

Source: Bloomberg.

Global Sector Views from the Janus Equity Team | 11


Opportunities & Trends

> Driven in part by compelling valuations, deal activity has picked up. Low stock

prices have translated into significant premiums in recent deals, a trend we expect to
continue. The flurry of activity is not isolated to biotechnology. Device makers, including
those focused on cardiovascular and spinal care, have commanded attractive prices.
> Pharmaceutical companies have continually had to readjust their portfolios to

Companies are
their product
portfolios to

accommodate an increasing focus on value, not just safety and efficacy. As a

consequence, were witnessing a high and sustained level of licensing activity, with
areas like oncology, immunology and cardio-metabolic diseases receiving the greatest
attention. We believe this portfolio rationalization process will help bolster the flagging
biotech sector by giving selective companies the opportunity to pursue non-dilutive
financing alternatives.
> Innovation continues to drive growth. While we do not expect Food & Drug

Administration (FDA) approvals to top last years record of 45, 2016 should still
register a robust number. Quicker approvals are the hallmark of the increased efficacy
of many new treatments and their ability to address high, unmet medical needs.

shifts in the
economics of
the industry.

Risks & Headwinds

> The recent backlash on drug prices, along with consolidation among payers,

represents a possible impediment to what drug companies can charge. The

pendulum started to swing after insurers were caught off guard by the extraordinary
demand for Sovaldi, a hepatitis C therapy. Unless new drugs demonstrate important
benefits for patients and value for the system, coverage becomes less certain. Already
we see certain new cardiovascular therapies receiving greater scrutiny.
> Political rhetoric during an election year could create continued volatility. Still, as

the field of presidential candidates has been winnowed and the election draws closer,
investors should be in a better position to differentiate between rhetoric and what may
ultimately be feasible.
> A backlog of pending approvals stands to put downward pressure on a select

group of generic products with limited competition.

Investment Implications
> We remain cautious on select specialty pharmaceutical companies, recognizing

that recent challenges have yet to fully dissipate. Debt-driven merger and acquisition
activity has resulted in leveraged balance sheets. At the same time, external pressure has
likely dented a business model reliant upon sizable price increases.
> Effective capital allocation remains critical to stock performance. Large-cap

companies that have overpaid for acquisitions have been punished by investors
while those that have consummated promising deals have been rewarded. Similarly,
management teams that have a proven track record in allocating capital toward
innovative products will continue to be perceived favorably by the market.
> As consolidation among payers threatens to weigh on revenue growth,

innovative cancer therapies stand out as an area where insurers are more
amenable to covering novel treatments.

12 | Global Sector View

Metastatic Melanoma Two-Year Overall Survival Rate


Two-Year Overall Survival Rate








(March 2011):

(December 2014):

Opdivo plus Yervoy

(October 2015):

Therapy Combination
(year of approval/usage)

The combination of innovative therapies have

resulted in survival rates more than doubling
during past five years.

Source: American Association of Cancer Research.

Global Sector Views from the Janus Equity Team | 13


Opportunities & Trends

> For multinational industrial companies, headwinds in Europe were reignited by

the June Brexit vote. Low rates have continued to support slow but stable growth,
particularly in western Europe. Autos have been particularly strong.
> The U.S. does not appear well positioned for a robust recovery. Although the first

two months of 2016 were strong, growth has been sluggish since then. However, both
residential and nonresidential construction segments have strengthened and, as a
result, we see room for continued growth.

Merger and
acquisition activity
remains high in
nearly all areas
within industrials,
and is being
supplemented by

> Merger and acquisition activity remains high in nearly all segments of the

industrials sector, and is being supplemented by companies able to provide cost

synergies. Due to the sectors recent weakness, topline growth has been achieved
through streamlining as more companies look to acquire firms where they can apply
their methods for improvement.

Risks & Headwinds

> In China, fixed-asset investment is decelerating. Despite some weaker numbers

early in the second quarter, the outlook remains healthy for industrial companies tied
to Chinese consumers.
> Despite recent strengthening in crude oil prices, energy companies are still at

companies able

risk. The lack of stability in the sector has made it difficult for companies to effectively
manage their projects.

to execute cost

> Currency continues to negatively impact multinationals. Weakness in international


currencies due to the strong dollar has had a negative impact on companies reported
financial performance, due to translation accounting. As Europe is a much bigger
market for U.S. large-cap multinationals than emerging markets, currency concerns
from Europe are a greater risk due to the recent Brexit vote.

Investment Implications
> Without high-conviction cyclical growth factors, we generally focus on company-

specific drivers of value. We are concentrating our attention on companies with a

proven record of superior capital allocation and quality management teams that have
effectively guided their firms through the entire business cycle.
> We are playing close attention to improving industries that are being helped

by consolidation.

1 4 | Global Sector View



Billion of U.S. Dollars (Chained, 2009)








Residential (left)

Structures (left)




Year-over-Year Change in U.S. Households (3 month avg.)

U.S. Residential and Nonresidential Fixed Investment

New Household Formation (right)

While gains have been registered,

especially in residential construction,
both are far below prerecession peaks,
leaving room for growth.
Source: Bureau of Economic Analysis, U.S. Census Bureau.

Global Sector Views from the Janus Equity Team | 15


Opportunities & Trends

> The transition to the cloud is accelerating. In contrast to a few years ago when

customers experimented with cloud based services, mission-critical functions are now
being placed on the cloud. Expense and security considerations are key drivers. The
broad adoption of the cloud, including software as a service (SaaS) and infrastructure
as a service(IaaS), has resulted in impressive growth rates for industry leaders, such as and Amazon Web Services, even off large revenue bases. The same
dynamic, however, has placed legacy software and hardware companies under pressure.

The broad
adoption of
software by
devices that
historically did
not utilize it has
due to cheap

> Consolidation within semiconductors is reshaping the landscape. With topline

growth elusive, companies are seeking to reap synergies from consolidation in order
to fuel earnings growth. Aiding the trend are founders and CEOs of possible targets
becoming more open to selling. Discounted valuations and cheap financing have also
played a role in furthering deals.
> Software eats the world continues unabated. The declining cost of connectivity

is enabling software to make myriad devices smarter. The breadth of applications

utilized in automobiles illustrates this trends transformative nature. We expect novel
applications to command a greater share of investment capital and ultimately account
for a larger portion of returns.

Risks & Headwinds

> The risks to legacy technology companies are underappreciated. While shares

in several legacy names have come under pressure, many investors continue to hold
them due to attractive dividend yields and their still-dominant position in industry
benchmarks. Yet, investors often do not understand the risks to underlying business
models. This is especially true for software companies that were slow in adopting
SaaS and hardware firms that overlooked the threat of the cloud.
> Privacy considerations may cast a shadow over certain Internet names.

Technology has moved faster than regulation. Eventually, governments may reassert
their influence. Alphabets Android mobile platform approaching 85% of global market
share could serve as a catalyst for greater scrutiny. A spotlight on the issue may also
cause Internet users, who have largely been complacent, to re-examine their attitude
toward privacy.
> Global economic growth remains challenged. While low growth poses a risk across

sectors, technologys prospects could benefit from a weak environment as companies

are required to achieve productivity gains to drive earnings growth. Investment in
technology will be a key ingredient in harvesting such efficiencies. Investors must
recognize, however, that the sectors imbedded resilience is no longer present in many
large-cap legacy names.

Investment Implications
> We continue to avoid larger legacy companies whose existing business models

we seriously question. The early-year volatility enabled us to reposition the portfolio

toward the higher-growth cloud names that we prefer.
> We see opportunity in segments of the semiconductor industry. While

smartphones garner headlines, we believe that other segments, including autos and
health care, may have more attractive growth trajectories, as they are earlier in the
lifecycle of software adoption.
> Within enterprise architecture, a bifurcation is developing. We favor companies

that do not have legacy product lines that must be wound down. New entrants with
novel approaches and platforms stand to gain an ever greater level of market share.
1 6 | Global Sector View

Semiconductor Industry Merger & Acquisition Activity


Quarterly Deal Volume, $ Billion


Quarterly deal premium

over past 5 years:









Average Premium Paid During Period


Q2 2013

Q2 2014

Q2 2015

Q2 2016

Since early 2015, both deal volume and average

premiums have climbed considerably in an
industry facing intense competitive pressures.

Source: Bloomberg.

Global Sector Views from the Janus Equity Team | 17



Invest with our clients interests first.

> Develop

a deep understanding of the

companies we research.

> Employ

a strong valuation discipline

focused on quality growth.


Develop independent and differentiated

views on our companies, supported by
in-depth primary research.


Spend as much time thinking about

what could go wrong as about what
could go right.


Take a long-term view.

> Seek

to anticipate change,
dont just analyze it.


Attract the best and brightest analysts

in the business, and foster an environment
in which they can succeed on behalf of
our investors.

1 8 | Global Sector View






Jean Barnard, CFA

Denny Fish

Tom Roller, CFA

Greg Kuczynski, CFA





Kris Kelley, CFA

John Jordan

Andy Acker, CFA

Ethan Lovell




Brinton Johns

Garth Yettick, CFA

David Chung, CFA

Global Sector Views from the Janus Equity Team | 19

Connect with Janus.

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