U.S. Sector portfolio positioning intra-quarter update as of 9/03/2020
Increased economically-sensitive sector exposure/trimmed late-phase, defensive sector exposure
September 3, 2020
We see continued economic progress in this recovery, which we believe will benefit Industrials companies and present a headwind for the relative performance of Consumer Staples. Additionally, Industrials stocks have lagged substantially year-to-date, while Staples stocks, despite their typically defensive nature, have largely kept pace in Q3’s continued market rally due, in part, to demand factors that we believe will prove temporary. Thus, we see more opportunity looking forward in the more economically-sensitive Industrials sector. We have also taken this opportunity to rebalance the portfolio.
Increased economically-sensitive sector exposure: We have added to the portfolio’s Industrials sector allocation. We are seeing a pickup in economic activity that we believe should benefit Industrials, e.g., improved machinery orders, increased shipping activity, and strong consumer spending on durable goods. Cost cutting should enhance the cyclical earnings recovery for Industrials, in our view, and new fiscal stimulus and/or a post-election infrastructure bill could offer further upside. Industrials should have some of the strongest U.S. sector earnings growth amongst all U.S. sectors in 2021, which, along with a market-like valuation, makes the sector increasingly attractive, in our view, at this stage of recovery.
Reduced late-phase, defensive sector exposure: We have trimmed the portfolio’s allocation to the Consumer Staples sector. The pandemic has created an unprecedented jump in demand for various Consumer Staples products, which we believe is likely to reverse when consumers feel safer and resume leisure activities like dining out and travel. Despite defensive characteristics, Consumer Staples had strong Q3 returns supported by positive earnings, but now elevated investor expectations could set up the sector for disappointing results going forward.