Strategic Sector Selector – A difficult balancing act

Global equities retreated in the first quarter of 2022 in the face of higher inflation and the war in Ukraine. The US Federal Reserve has become even more hawkish despite the increasing threat of a significant slowdown in economic growth. Despite these headwinds, we think the global economy will muddle through, but we now expect less growth and more inflation than at the beginning of the year. We continue to believe in a balanced sector allocation to both early- and late-cyclicals and growth and value factors, although volatility may remain high in the short term. However, our interest rate expectations imply a more favourable environment for the growth factor and therefore we tilt our allocations slightly to reflect that. We increase our allocations to media and downgrade real estate both to Neutral. We also raise healthcare to Overweight to reflect elevated risks to the economic cycle. Finally, we believe that valuations of the energy sector reflect most of the upside from high oil prices and reduce our allocation to Underweight.