Strategic Sector Selector - Feeling our way towards recovery

In the final quarter of 2022, global equities recovered some of the ground lost earlier in the year. Inflationary pressures eased somewhat, and the pace of monetary tightening slowed. The outlook for equity markets remains uncertain in the near term, but we think the regime will shift to recovery in the first half of 2023. Nevertheless, we only reduce our defensive allocation slightly by downgrading telecommunications to Underweight, while we keep our Overweights in consumer staples and healthcare. We upgrade basic resources that we think will be boosted by an acceleration in economic growth in Asia after a full reopening after COVID-19 restrictions in the region. We also reshuffle our positioning in consumer discretionary by upgrading automobiles & parts to Neutral and retailers to Overweight, while downgrading media to Neutral. Finally, we reduce our allocation to real estate as we expect higher interest rates to hurt their prospects, while we upgrade insurance as a hedge against an inflation overshoot (both sectors move to Neutral).
Changes in allocations:
- Upgrades: basic resources, retailers (N to OW), automobiles & parts, insurance (UW to N)
- Downgrades: media, real estate (OW to N), telecommunications (N to UW)
Most favoured | Least favoured | |
Sector | European basic resources | US banks |
US technology | European utilities |
Sectors where we expect the best returns:
- Healthcare: exposure to moderating rate expectations, defensive sector, strong pricing power
- Basic resources: high yield, exposure to cyclical upswing, undemanding valuations
- Technology: resilient demand for products and services, high margins, exposure to growth factor

Notes: On the horizontal axis, we show how far a sector’s valuation is above/below that implied by our multiple regression model (dividend yield relative to market). The vertical axis shows the perpetual real growth in dividends required to justify current prices relative to that implied for the market. We consider the sectors in the top right quadrant expensive on both measures, and those in the bottom left are considered cheap. See appendices for methodology and disclaimers. Source: Refinitiv Datastream and Invesco