Global Conservative portfolio positioning intra-quarter update as of 04/11/2024

We continue to see two potential paths for the U.S. economy–either a slowdown with a risk of recession or a “soft landing” with moderate growth that extends the economic cycle. Given ongoing resilience of some economic data and potential for monetary policy easing, we have continued to adjust portfolio exposures to modestly increase expected economic sensitivity and take advantage of specific market opportunities.

April 11, 2024

ACTIONS and OVERVIEW:

Moved to an overweight of the U.S. Financials equity sector

• Added to existing U.S. Financials sector ETF holding
• Added new U.S. Capital Markets industry ETF holding

Reduced late-phase U.S. equity sector overweight

• Trimmed existing U.S. Health Care sector ETF holding

Portfolio rebalance

We have increased exposure to the U.S. Financials equity sector, including a targeted allocation to the Capital Markets industry, which we believe should benefit from easing financial conditions and continued economic growth.  We continue to avoid other early-phase, economically sensitive sectors, as we believe a reacceleration to sustained above-trend economic growth is highly unlikely at this point in the cycle.  At the same time, we trimmed exposure to the U.S. Health Care sector, reflecting our incrementally positive economic outlook, while still maintaining a significant overweight to the sector given its attractive earnings growth prospects and defensive characteristics amid ongoing late-cycle risks. We also took this opportunity to rebalance portfolios.

UPDATE DETAIL:

Moved to overweight of the U.S. Financials equity sector

• Our updated U.S. economic outlook now incorporates an increased probability of continued economic growth and prospects for easier monetary policy, which we believe introduce potential tailwinds for the U.S. Financials sector.
• We believe Capital Markets industry revenue and earnings, in particular, are positioned to rebound following a dearth of dealmaking and underwriting activity that drove a sharp downturn in industry earnings over the last two years.
• Lending standards, debt and equity issuance, and financial conditions continue to stabilize or improve, which we believe could support increased investment banking activity.
• For large banks, we believe the prospect of lower interest rates and current balance sheet strength mitigate economic and industry-specific risks that have weighed on valuations.
• We also see the Financial Services industry benefiting from secular growth in credit card and digital payments, while the Insurance industry should benefit from rising premiums and a reversal of post-COVID underwriting losses.

Reduced late-phase U.S. equity sector overweight

• Given the rising prospects we see for slow-to-moderate economic growth through 2024, we have reduced our overweight of the traditionally defensive U.S. Health Care sector in favor of additional U.S. Financials exposure.
• Still, Health Care, the best-performing late-phase U.S. sector over the past year, remains our largest U.S. sector overweight, which we see as warranted by the sector’s attractive earnings growth potential amid slow-to-moderate economic growth and lingering macroeconomic risks.
• We expect the U.S. Health Care sector should generate double-digit earnings growth in 2024 and 2025, exceeding its long-run, high-single-digit earnings growth potential.
• Health Care valuations relative to the market remain at reasonable levels, in our view, given the earnings growth potential over the next 18 months.