Global Equity portfolio positioning intra-quarter update as of 01/13/2023
With slowing economic growth and increased risk of recession, we see increased risk to corporate earnings for more economically cyclical sectors. We have increased our overweight of U.S. late-phase, defensive sector exposure and eliminated our active overweight of the U.S. mid-phase Information Technology sector.
January 13, 2023
ACTIONS and OVERVIEW:
Increased U.S. late-phase sector overweight; U.S. reduced mid-phase sector exposure
- Added to existing Consumer Staples ETF holding
- Trimmed existing Information Technology ETF holding
The rapid evolution of this economic cycle, along with both a deterioration in certain economic readings and the Fed’s aggressive monetary policy stance, point to later-cycle economic conditions in the U.S. We see slower economic growth, increased risk of recession, and higher potential for disappointing earnings growth, particularly for companies in economically sensitive parts of the market. Evolving risks to economic and earnings growth along with reduced interest rate risk, warrant, in our view, increased allocation to U.S. late-phase sector exposure. Thus, we have increased the portfolio’s allocation to the U.S. Consumer Staples sector while eliminating our active overweight of the mid-phase U.S. Information Technology sector. We are also taking this opportunity to rebalance portfolio positions that have drifted from target allocations due to market movements.
Increased U.S. late-phase sector overweight; reduced U.S. mid-phase sector exposure
- Given our outlook for slowing economic growth and a rising risk of recession, we continue to emphasize sectors that have historically demonstrated lower volatility in revenue and earnings than the broader market.
- We believe that U.S. Consumer Staples sector earnings will remain more resilient than the broad market, even with potential headwinds from higher labor costs and slowing topline growth from less demand and lower price gains.
- While the Consumer Staples sector currently trades at a relative valuation premium to the S&P 500 and near the upper end of its historical range, this dynamic is common during economic slowdowns and recessions.
- We see incremental fundamental risks for the Information Technology sector, including slower corporate investment in software and cloud computing, as well as weaker consumer demand for personal electronics as the impact of a slowing economic backdrop is likely to compound post-COVID headwinds.
- While we continue to avoid the most economically cyclical early-phase sectors, we maintain an allocation to the U.S. Information Technology sector, as we believe it and other mid-phase sectors give portfolios an appropriate degree of economic sensitivity and should see less deceleration in revenue and earnings growth than early-phase sectors as the economy slows.