Global Equity portfolio positioning intra-quarter update as of 10/13/2023

With stronger-than-expected U.S. economic activity so far this year, we still see late-cycle risks of a significant slowdown ahead. We have modestly adjusted sector allocations in the U.S. to take advantage of opportunities in our Health Care and Communication Services sector overweights.

October 13, 2023

ACTIONS and OVERVIEW:

Increased mid-phase U.S. sector overweight

• Added to existing Communication Services ETF holding

Decreased and adjusted late-phase U.S. sector overweight

• Trimmed existing Utilities ETF holding
• Added to existing Health Care ETF holding

Portfolio rebalance

Resilient consumer spending and other pockets of strength have supported stronger-than-expected real GDP growth near its long-term average in the U.S. this year.  However, we still expect that economic growth will slow to below-trend in the next 6 to 18 months, and we see risk of an even sharper slowdown tied to lagged impacts of elevated interest rates, tight lending standards, and slowing corporate profit growth.

Our portfolios remain defensively positioned, with avoidance of early-phase, cyclical U.S. sectors, but we have modestly adjusted allocations to capitalize on opportunities in our U.S. Health Care and Communication Services overweights, and to manage our U.S. Utilities sector overweight, given a challenging interest rate backdrop for the sector.

We also took this opportunity to rebalance portfolios.

UPDATE DETAIL

Increased mid-phase U.S. sector overweight

• We believe the U.S. Communication Services sector can achieve attractive earnings growth in a stable or slowing economic backdrop, given its exposure to secular trends in technology such as streaming media and digital advertising as well as the potential for margin expansion in the sector.
• The Communication Services sector currently trades at a reasonable valuation, in our view, relative to the broad market and compared to the sector’s own history.

Decreased and adjusted late-phase U.S. sector overweight

• We believe the U.S. Utilities sector, while still an overweight, is incrementally less attractive than other late-phase sectors in the current interest rate environment.
• Interest rates have moved sharply higher this year, reflecting both continued economic resilience and the Federal Reserve’s signaling of a “higher for longer” rate policy, which presents incremental headwinds to highly levered, capital intensive companies with high dividend yields, like Utilities.
• Utilities company valuations in the U.S. have compressed meaningfully year-to-date, but we believe these valuations are appropriate given current interest rate dynamics.
• We believe Health Care, our largest U.S. sector overweight, possesses attractive fundamentals and could exceed its long-term, high single-digit growth potential in the next 6 to 18 months as the sector moves past its largest earnings decline since 2009, which was largely driven by COVID-specific factors that are now abating.
• Health Care sector valuations in the U.S. remain at reasonable levels, in our view, given the sectors’ attractive earnings growth prospects over the next two-plus years.