Global Balanced portfolio outlook, positioning, and attribution as of 12/31/2022
December 31, 2022
- With the rapid evolution of this economic cycle, deterioration in some economic data along with the Fed’s aggressive monetary policy stance point to later-cycle economic conditions here in the U.S. and abroad, in our view.
- Some areas of the global economy remain sound, such as the U.S. labor market and services consumption, but we believe the full impact of tighter monetary policy has yet to be felt.
- In this evolving environment, we see increased risk to corporate earnings, particularly for the most economically sensitive parts of the markets.
- We expect earnings growth to vary significantly across U.S. sectors in 2023, as is typical when risk of recession is elevated, and we believe sector allocation will be key to investment outcomes in the coming quarters.
- Internationally, as global economic growth slows, we see continued risks for Europe tied to the war in Ukraine, and we expect headwinds for economically cyclical emerging markets, while we see developed Asia as a relative bright spot.
- While risks to equities have increased, risks to fixed income have diminished, in our view, following the sharp rise in interest rates this year, as slowing economic growth and a likely easing of inflation should reduce upward pressure on intermediate and longer-term interest rates, and a Fed-induced slowdown could ultimately push down longer-term interest rates.
- We are avoiding early-phase cyclical U.S. sectors and, instead, are emphasizing sectors that we expect will see less earnings deceleration and margin compression as economic growth slows.
- We have added to our late-phase, defensive U.S. sector exposures, with overweights of Health Care, Consumer Staples, and Utilities.
- We also maintain allocations to the U.S. Information Technology and Communication Services sectors, which we believe are attractive at this stage of the cycle given their lower revenue volatility and more secular-oriented growth profiles versus more cyclical sectors.
- We remain underweight to international equities, as a whole, including underweights of Europe and emerging markets, but we maintain an overweight of developed Asia, where we see the greatest potential for economic resilience abroad.
- Seeing reduced risk to fixed income returns, and late economic cycle risks to equities, we maintain a modest overweight of fixed income and, within fixed income, we are emphasizing longer-term securities that should benefit from declining long-term interest rates, and floating rate Treasuries that carry high and potentially rising yields.
- U.S. Health Care equities
- Developed Asia equities
- U.S. Information Technology equities
- U.S. Consumer Discretionary equities
- Fixed Income asset class
- U.S. Industrials equities
- Western Europe equities
- U.S. Energy equities