Strategic Sector Selector - Schrodinger’s allocation?

The market recovery continued in the first quarter of 2023 in the face of increasing pressure from an impending economic slowdown and troubles in the banks sector. Although the monetary tightening cycle nears its end, in our view, its impact will continue to be felt in the next 12 months. We still expect the global economy to avoid a deep recession, which implies that equity markets will not revisit 2022’s market trough, in our view, although sentiment will remain fragile in the near term. Therefore, we make only two changes to increase the resilience of our model sector allocation in this period of uncertainty. We downgrade basic resources to Underweight from Overweight after the great reopening of China proved to be less supportive than we expected and in the belief that lower economic growth will not be enough to push commodity prices sustainably higher. In turn, we upgrade telecommunications to Neutral to slightly increase our exposure to defensive sectors alongside our Overweights in consumer staples and healthcare. Nevertheless, we keep faith with a selection of early-cyclicals, while maintaining our Underweights in financials (except insurance) and energy. 

Changes in allocations: 

• Upgrades: telecommunications (UW to N)
• Downgrades: basic resources (OW to UW)

Sectors where we expect the best returns: 

• Healthcare: exposure to moderating rate expectations, defensive sector, strong pricing power
• Retailers: resilient in economic downturns, may outperform in cyclical upswing, exposure to growth factor
• Technology: resilient demand for products and services, high margins, exposure to growth factor