Strategic sector selector - Jumping into muddy puddles

Global equities closed 2023 with a strong rally as investors became increasingly confident that major developed market central banks may be ready to start easing policy. Meanwhile, economic growth and labour markets remained resilient, especially in the US, although surveys suggested that a slowdown may be coming. We expect global growth to moderate from current levels in the first half of 2024 (and we cannot completely rule out a recession), and we assume that a recovery will start in the second half. We think that equity markets may anticipate that recovery, which reinforces our view that we have entered the mid-cycle stage of the equity market cycle. Therefore, we reduce our exposure to defensive sectors by downgrading telecommunications to Underweight (from Overweight). We also reduce our allocation to basic resources, where valuations have run ahead of fundamentals, in our view. At the same time, we increase our allocation to cyclical sectors, upgrading media and banks to Overweight (from Underweight and Neutral respectively).
Changes in allocations:
- Upgrades: media (UW to OW), banks (N to OW)
- Downgrades: basic resources (N to UW), telecommunications (OW to UW)
Most favoured | Least favoured | |
Sector
|
US media US real estate |
US automobiles & parts European travel & leisure |
Sectors where we expect the best returns:
- Media: attractive valuations, focus on profitability, exposure to potential consolidation
- Food, beverage and tobacco: hedge against market volatility, exposure to growth factor
- Real estate: attractive valuations, high dividend yield, potential beneficiary of lower interest rates

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: LSEG Datastream and Invesco Global Market Strategy Office