Global Equity portfolio positioning intra-quarter update as of 10/13/2023
With stronger-than-expected U.S. economic activity so far this year, we still see late-cycle risks of a significant slowdown ahead. We have modestly adjusted sector allocations in the U.S. to take advantage of opportunities in our Health Care and Communication Services sector overweights.
October 13, 2023
ACTIONS and OVERVIEW:
Increased mid-phase U.S. sector overweight
- Added to existing Communication Services ETF holding
Decreased and adjusted late-phase U.S. sector overweight
- Trimmed existing Utilities ETF holding
- Added to existing Health Care ETF holding
Portfolio rebalance
Resilient consumer spending and other pockets of strength have supported stronger-than-expected real GDP growth near its long-term average in the U.S. this year. However, we still expect that economic growth will slow to below-trend in the next 6 to 18 months, and we see risk of an even sharper slowdown tied to lagged impacts of elevated interest rates, tight lending standards, and slowing corporate profit growth.
Our portfolios remain defensively positioned, with avoidance of early-phase, cyclical U.S. sectors, but we have modestly adjusted allocations to capitalize on opportunities in our U.S. Health Care and Communication Services overweights, and to manage our U.S. Utilities sector overweight, given a challenging interest rate backdrop for the sector.
We also took this opportunity to rebalance portfolios.
UPDATE DETAIL
Increased mid-phase U.S. sector overweight
- We believe the U.S. Communication Services sector can achieve attractive earnings growth in a stable or slowing economic backdrop, given its exposure to secular trends in technology such as streaming media and digital advertising as well as the potential for margin expansion in the sector.
- The Communication Services sector currently trades at a reasonable valuation, in our view, relative to the broad market and compared to the sector’s own history.
Decreased and adjusted late-phase U.S. sector overweight
- We believe the U.S. Utilities sector, while still an overweight, is incrementally less attractive than other late-phase sectors in the current interest rate environment.
- Interest rates have moved sharply higher this year, reflecting both continued economic resilience and the Federal Reserve’s signaling of a “higher for longer” rate policy, which presents incremental headwinds to highly levered, capital intensive companies with high dividend yields, like Utilities.
- Utilities company valuations in the U.S. have compressed meaningfully year-to-date, but we believe these valuations are appropriate given current interest rate dynamics.
- We believe Health Care, our largest U.S. sector overweight, possesses attractive fundamentals and could exceed its long-term, high single-digit growth potential in the next 6 to 18 months as the sector moves past its largest earnings decline since 2009, which was largely driven by COVID-specific factors that are now abating.
- Health Care sector valuations in the U.S. remain at reasonable levels, in our view, given the sectors’ attractive earnings growth prospects over the next two-plus years.
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’ Global Equity 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. Upon request, WestEnd Advisors will provide a list of all recommendations for the prior year.