U.S. Sector portfolio positioning intra-quarter update as of 8/19/2022
We have continued to position portfolios for a mid-to late-phase economic backdrop by eliminating Energy exposure and increasing Utilities exposure.
August 19, 2022
ACTIONS and OVERVIEW:
Eliminated early-phase Energy sector allocation
- Sold remaining Energy sector ETF position
Increased allocation to late-phase Utilities sector
- Added new position in a Utilities sector ETF
The U.S. and global economic cycles continue to progress rapidly. We expect the U.S. economic expansion is likely to extend into 2023, but, as anticipated, we continue to see signs of slowing growth in economic data. We also believe the Federal Reserve’s shift toward more aggressive monetary tightening has exacerbated risks that the economic cycle could progress toward a late-phase slowdown more rapidly than we expected in our base case earlier in the year. In this evolving environment, we see increased risk to corporate earnings and, more broadly, to the performance of particularly economically sensitive parts of the financial markets.
With this ongoing progression of the cycle, and building on recent portfolio adjustments, we have continued to position portfolios for a mid- to late-phase economic backdrop by eliminating Energy sector exposure and adding to existing Utilities sector exposure.
Eliminated early-phase Energy sector allocation
- The risk/reward profile for the Energy sector has become less attractive, in our view, following the post-Covid rebound in oil & gas demand, which coincided with a significant period of outperformance for the sector.
- As the economy enters the latter stages of this cycle, we believe oil & gas demand growth is likely to decelerate, even as more supply is set to come online, which should help balance energy market fundamentals into 2023.
- We believe the shift from a historically tight energy market to one that is more balanced should limit additional upside for oil & gas prices as well as sector earnings. In our view, Q2 2022 likely marked the high water mark for Energy sector EPS growth this cycle, and analysts’ elevated EPS estimates appear too optimistic.
- Oil prices have fallen more than -10% since the beginning of Q3 amid global slowdown fears, yet the S&P 500 Energy sector has posted positive returns over the period.
- If economic growth were to slow faster or further than we currently anticipate, our research indicates the potential for significantly more downside for oil prices, natural gas prices, and refining margins.
Increased allocation to late-phase Utilities equity sector
- The Utilities sector is increasingly attractive, in our view, given ongoing progress in the economic cycle and rising recession risks.
- We believe the stability of the sector’s revenues and earnings leaves Utilities well insulated from the mounting economic risks facing broader market earnings estimates, justifying, in part, the sector’s above average valuation.
- Utilities companies should also benefit from the ability to pass through higher fuel costs to customers in the current inflationary environment, in our view, while the sector’s domestic focus provides a cushion against foreign exchange and supply chain headwinds.
The most recent complete presentation can be viewed here.
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’ U.S. Sector 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.