Even the least-favored sectors may be appropriate for portfolios seeking a more balanced equity allocation.
Investors in the US stock market will be having a close watch on the sectors in the economy that will show promising growth. Raymond James Financial Services in its Investment strategy quarterly report looks at a few sectors which they think can do well over other sectors. The report is intended to highlight the dynamics underlying the 11 S&P 500 sectors, with a goal of providing a timely assessment to be used in developing your personal portfolio strategy.
In the report, they state that their time horizon for the sector weightings is not meant to be short-term oriented. “Our goal is to look for trends that can be sustainable for several quarters; yet given the dynamic nature of financial markets, our opinion could change as market conditions dictate. Most investors should seek diversity to balance risk versus reward. For this reason, even the least-favored sectors may be appropriate for portfolios seeking a more balanced equity allocation.”
These recommendations are displayed as:
Overweight: Favored areas to look for ideas, as we expect relative outperformance
Equal Weight: Expect in-line relative performance
Underweight: Unattractive expectations relative to the other sectors; exposure might be needed for diversification
Here a few sectors on which the firm is Overweight:
Information technology
We remain overweight in the technology sector. The deteriorating technical picture and obvious rotation in the market does cause some angst. However, with fundamental trends healthy (note the revision trends for 2021 and 2022) we are going to stay Overweight for now. As the year progresses, fundamentals should overcome ‘factor’ investing.
Consumer discretionary
We remain overweight in the consumer discretionary sector with a bias to favor the equal-weight index. Record levels of consumer savings, additional government transfer payments coming, and a return to semi-normal later this year are compelling tailwinds for investors in Consumer Discretionary stocks.
Financials
We are moving to overweight for the financials based on a time frame beyond 3 months. The outlook for the sector is much brighter given higher interest rates and expectations for rapid economic growth this year. Earnings estimates are being revised higher due to the more favorable backdrop.
The sector’s tight correlation (91% over the past 12 months) highlights the importance of interest rate moves for the sector, at least for the near term. With interest rates experiencing a rapid increase (recent 3-standard deviation move in the 2/10 year is the only one recorded over the past 30 years), they may pull back at any time and take the Financials with them.
We would not wait for such an occurrence, given our belief that the yield curve remains steep and interest rates will be higher over the next 12 months. The attractive relative valuation is an additional reason to favor the sector.
Communication services
We continue to favor the communication services sector. The sector will not see the heady earnings growth of the deep cyclical sectors in 2021. However, consensus forecasts reflect respectable mid-teens growth for the year. Adding attractive valuation and positive technical momentum to the expected earnings growth reaffirms our Overweight stance.
Industrials
We expect industrials to benefit as investors seek ways to play the economy accelerating in the months ahead. The sector will get an additional boost as manufacturing benefits from companies scrambling to replenish under-stocked inventories.
Here a few sectors on which the firm is Equal Weight
- Health care
- Energy
- Materials
And, the firm is Underwright on these:
- Consumer staples
- Utilities
- Real estate
Those investors seeking a more aggressive investment style may choose to overweight the preferred sectors and entirely avoid the least favored sectors. Investors should consult their financial advisors to formulate a strategy customized to their preferences, needs, and goals.
Disclaimer: The investing decision in any stock/sector should be taken on your own after carefully evaluating the business and other fundamentals of the company/sector and after consulting one’s financial advisor. It is not a recommendation to buy, hold or sell in any of the stocks or invest in any sector. Financial Express Online does not bear any responsibility for their investment advice.