Strategic sector selector - Desperately seeking direction

The rally in global equities has started showing signs of running out of juice, mainly driven we think, by a rotation out of technology and consumer discretionary into financials and energy. Concerns have increased about interest rates having to stay “higher for longer” as the US economy has proved more resilient than expected, while an increase in energy prices stalled the decline in headline inflation rates. We expect economic growth to fall from current levels followed by the emergence of a new cycle in the next 12 months, though we do not expect a deep global recession. Nevertheless, as long as uncertainty remains about when an eventual economic recovery will start, we expect markets to remain unsettled. Therefore, we retain our allocations to defensive sectors and decrease retailers to Neutral from Overweight. However, as we slowly transition to a more mature phase in the cycle, we raise industrial goods & services to Overweight (from Neutral) and in a nod to an increase in geopolitical risks, we upgrade energy to Neutral. 

Changes in allocations: 

• Upgrades: energy (UW to N), industrial goods & services (N to OW)
• Downgrades: retailers (OW to N)

Sectors where we expect the best returns: 

• Healthcare: exposure to moderating rate expectations, defensive sector, strong pricing power
• Food, beverage and tobacco: resilient in economic downturns, exposure to growth factor
• Real estate: attractive valuations, high dividend yield, exposure to eventual recovery in housing markets