Strategic Sector Selector - Rotating into cyclicals
The initial enthusiasm may have faded after the US Presidential election, but global equities still had positive returns in Q4 2024. Market leadership changed with early-cyclicals outperforming, especially consumer discretionary and financials. We expect global growth to move towards trend in 2025 (we think recession is a tail risk), and we assume inflation to remain contained. We think equity markets will “grind higher” even after strong returns in 2024, and we do not expect the market expansion to end. With that in mind, we increase our allocation to cyclical sectors by upgrading energy and media to Overweight and basic resources and industrial goods & services to Neutral. At the same time, we reduce our allocation to defensives by downgrading personal care, drug & grocery stores to Neutral, and healthcare and utilities to Underweight. Finally, with the support from increasing bond yields fading, we downgrade insurance to Neutral.
Changes in allocations:
- Upgrades: energy, media (N to OW), basic resources, industrial goods & services (UW to N)
- Downgrades: personal care, drug & grocery stores, insurance (OW to N), utilities (N to UW), healthcare (OW to UW)
| Most favoured | Least favoured |
| US retailers | US utilities |
| US banks | European telecommunications |
Sectors where we expect the best returns:
- Retailers: well-diversified sector, exposure to growth factor and potential rebound in consumer spending
- Banks: steepening yield curve, attractive valuations, exposure to accelerating growth
- Financial services: exposure to pick-up in investment banking cycle, tends to outperform in mid-cycle phase
Notes: Data as of 31 December 2024. 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.
Investment Risks:
The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations), and investors may not get back the full amount invested.
