Sector Strategy: Reflationary Revisions… Given the outlook for reflation and reduced regulatory oversight that has taken hold in the US following the recent elections, we are fine-tuning our sector strategy. We are upgrading Financials to Overweight from Neutral as it is a near-term beneficiary of a steepened yield curve. Longer term, the sector could also benefit from a reduction in regulatory headwinds. That said, our previous research has shown the sector is very sensitive to governance issues. (See Evolving Lifecycles in an ESG Materiality Matrix, September 29, 2016). In addition, we are looking increasingly favorably at Information Technology and Energy given their relatively strong earnings fundamentals, although valuations in those sectors still look lofty.
But Avoiding Most Defensive Sectors. We remain Underweight Health Care. While some industries — e.g., biotechnology — have performed strongly (Appendix 1) in anticipation of reduced regulatory oversight, the sector as whole has a mediocre near- term earnings outlook. We also remain Neutral Utilities, Consumer Staples, Telecom.
Regional Strategy: Remain Overweight Russia. Even after its strong performance in November (Appendix 2), we remain Overweight Russia as it continues to offer the favorable combination of relatively strong earnings momentum and reasonable valuations. We remain Underweight the Emerging Markets of China, South Africa and India.
Figure 1: Sector Rankings
Source: Cornerstone Capital Group.
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Michael Geraghty is the Global Equity 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.