Global Equity portfolio positioning intra-quarter update as of 04/11/2025

Amid late-cycle economic conditions and elevated policy uncertainty in the U.S., we anticipate near-term economic deceleration, though we still see potential for subsequent extension of the cycle if uncertainty eases. While continuing to balance defensive and economically sensitive exposures, we have refined the portfolio’s more cyclical exposure as we see risks and opportunities evolving.

April 11, 2025

ACTIONS and OVERVIEW:

Reduced U.S. Financials sector exposure

• Trimmed existing Financials ETF holding

Increased U.S. Communication Services sector exposure

• Added to existing Communication Services ETF holding

Portfolio rebalance

We still see late-cycle economic conditions in the U.S. and anticipate that the combination of protectionist trade policy, government spending cuts and job cuts, diminished private sector hiring, and slower household wealth gains all have the potential to weigh on economic growth this year.  The Trump administration’s announcement of sweeping tariff plans increased our confidence in this near-term outlook.  Even with the 90-day pause on most of the higher tariffs, the potential burden of negotiating scores of bilateral trade deals one-by-one presents lingering uncertainty, as well.  We are mindful of the fact that equity markets had sold off materially in anticipation of a tariff shock.  Still, damage has likely already occurred with respect to consumer and business confidence, and we view a slowing growth scenario as a high likelihood in the near term. Meanwhile, the intermediate and longer-term outlook remains highly dependent, in our view, on how policies develop in the coming months.

Given current market volatility, we remain comfortable balancing an overweight of late-phase defensive sectors with select economically sensitive sector exposures in U.S. equity allocations.  Within the more economically sensitive U.S. sector exposures, however, we have made adjustments for shifting risks and opportunities we see.  We trimmed U.S. Financials from an active overweight to a more neutral allocation, and we increased our overweight of U.S. Communication Services, where we now see a more attractive risk/reward profile.

UPDATE DETAIL:

Reduced U.S. Financials sector exposure

• U.S. Financials may be relatively insulated from direct tariff impacts due to their services orientation and domestic focus, but slower growth is a risk to sector fundamentals.
• Banks have benefited recently from easing deposit repricing pressure, as well as stabilizing delinquency and charge-off trends, but we see risks to Banks’ asset quality and net interest income as the economy decelerates.
• We also believe that the growing uncertainty stemming from the scope of recent policy announcements will likely hamper the recovery in M&A activity, weighing on the fundamentals of Banks and Capital Markets firms.
• Given that any positive developments in the current fluid environment could drive a rebound in risk asset valuations, we are maintaining a benchmark-like Financials allocation, which should help portfolios participate in upside volatility.

Increased U.S. Communication Services sector exposure

• The U.S. Communication Services sector has historically demonstrated its strongest relative performance among mid-phase sectors during economic slowdowns.
• The sector is expected to post healthy earnings growth in 2025 and 2026, and we believe digital advertising should prove more resilient than other cyclical industries.
• Communication Services has the most compelling valuations of any mid-phase U.S. sector, in our view, and absolute valuations at current levels have typically been associated with healthy returns on a go-forward basis.