Global Conservative portfolio outlook, positioning, and attribution as of 12/31/2022
December 31, 2022
Outlook
- 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.
Positioning
- 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.
Q4 Attribution
Positive Contributors:
Overweight
- U.S. Health Care equities
- Developed Asia equities
Underweight
- Short-term (0-3 yr.) fixed income
- U.S. Consumer Discretionary equities
Negative Contributors:
Underweight
- Equity asset class
- U.S. Industrials equities
- Western Europe equities
- U.S. Energy equities
Attribution Analysis is relative to the Global Conservative benchmark and was current as of the date specified in this presentation.
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Any portfolio characteristics, including position sizes and sector allocations among others, are generally averages and are for illustrative purposes only and do not reflect the investments of an actual portfolio unless otherwise noted. The investment guidelines of an actual portfolio may permit or restrict investments that are materially different in size, nature and risk from those shown. The investment processes, research processes or risk processes shown herein are for informational purposes to demonstrate an overview of the process. Such processes may differ by product, client mandate or market conditions. Portfolios that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than a portfolio whose investments are more diversified.
Holdings, Sector Weightings, and Portfolio Characteristics were current as of the date specified in this presentation. The listing of particular securities should not be considered a recommendation to purchase or sell these securities. While these securities were among WestEnd Advisors’ Global Conservative holdings at the time this material was assembled, holdings will change over time. There can be no assurance that the securities remain in the portfolio or that other securities have not been purchased. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities presently in the portfolio. Individual clients’ portfolios may vary. Upon request, WestEnd Advisors will provide a list of all recommendations for the prior year.