Global Balanced portfolio positioning intra-quarter update as of 9/20/2021
Adjusted U.S. large-cap sector exposure incrementally for evolving economic cycle
September 20, 2021
Actions and Overview:
- Added to existing U.S. Information Technology equity sector ETF holding
- Trimmed U.S. Energy equity sector ETF holding
We have adjusted U.S. equity sector exposures within our Global Balanced strategy to further emphasize mid-phase rather than early-phase sectors as we anticipate continued evolution of the economic cycle from rapid expansion to more normalized recovery. A variety of economic indicators point to significant progress in the economic recovery. In Q2 2021, for example, GDP reached a new high, and BEA’s measure of corporate profits was +16% above pre-pandemic levels. We expect to see further progress in the economic cycle over the next 12 to 18 months. In our view, this economic environment will be characterized by above-trend-but-decelerating growth, which is typical as the economy shifts from recovery to expansion. We also expect the economic transition from recovery to expansion should see sector leadership shift from early-phase cyclicals to mid-phase sectors that can benefit from both cyclical and secular growth.
Added to existing U.S. Information Technology equity sector ETF holding:
- We believe the U.S. Information Technology sector will continue to benefit from economic growth and experience less deceleration of revenue and earnings growth than other economically-sensitive sectors, given strong secular demand and other sector fundamentals.
- Economic data indicates that current business capex spending is strong and continues to be directed to tech hardware and software, amid a need for greater productivity as economic growth slows.
- We believe U.S. consumer strength, backed by over $2 tril. in above-trend savings during the pandemic, will benefit key areas of sector as the economy shifts from recovery to expansion, including payment processors and mobile device makers.
- These fundamental factors should, in our view, translate into durable, above-market earnings growth for the U.S. Information Technology sector in the coming quarters.
- While the sector has an above-market P/E valuation, its free cash flow yield is in line with the S&P 500, and its strong balance sheets and profitability give us comfort in adding to the sector at current valuations.
Trimmed U.S. Energy equity sector ETF holding:
- The U.S. Energy sector has recently benefitted from oil & gas demand out-pacing supply, but we expect oil demand growth will decelerate with slowing economic growth in 2022, while more supply is set to come online.
- At the same time, we expect elevated commodity prices and operating cost cuts will continue to drive the Energy sector earnings recovery over the next few quarters, even as relative valuations remain at record-low levels.
- Balancing these factors, we believe maintaining an allocation to the sector will allow portfolios to benefit if COVID-19 headwinds dissipate and/or economic growth or inflation surprise to the upside in the near term.