Cyclical Weakness — The weakness in global equity markets in September (MSCI ACWI -3.8%) was particularly evident in Materials (-8.5%) and Energy (‑7.8%), likely reflecting continued downward earnings estimate revisions in these two cyclical sectors. Not surprisingly, commodity-oriented regions also performed poorly: Latin America (-7.9%), South Africa (‑7.3%), Australia (‑5.3%).
Maintain a Defensive Sector Strategy — With stock prices falling as fast as earnings estimates in many cyclical sectors, we maintain a defensive sector strategy. We are Underweight Energy, Materials, and Industrials. Our only Overweight is in Financials.
Regional Strategy Largely Unchanged — Japan remains our sole Overweight; Latin America, Europe and India remain Underweight. Largely reflecting modest improvements in relative valuations, we upgrade China and Russia to Neutral from Underweight.
Figure 1: Regional Over- and Underweights Figure 2: Sector Over- and Underweights
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Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.