This article was last updated on April 22, 2023
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Stock Market Outlook May 2023
Not Forward March But Abeyance To Rebuild. Events add up to capital markets recognizing the interface between margin of safety or risk premiums and quality while also reflecting that millisecond mega data momentum is not all knowing nor all encompassing. Unfortunately, adequate focus on margin of safety seems to occur mainly on reappraisals after debacles. It was mainly so even recently on both sides of the Atlantic in small and significantly larger entities in their highly regulated banking segment and likely lies obscured elsewhere. It has become popular to blame central bank policies changes. However due to prior public finance and corporate management capital budget lax, in the current environment, we believe quality of delivery and balance sheet robustness build imperatives have further to go. Logistical weaknesses, expanding wars, ongoing pandemic and geopolitical rivalry appear long lived and of risk of further expansion.
Central bank policy change and the flaring of inflation have been of impact. We expect better balance between valuation compared to the erstwhile fervor for momentum that seemed to characterize the last cycle and which flared even in parts of Q1/2023. Corrections over time rather than all at once seem likely. As seen in recent global projections by the likes of the ADB, IMF, the World Bank and the OECD, recession may be only barely avoided and hence economic growth remains fragile and bifurcated. The Federal Reserve last raised Fed Funds to 5.0%, leaving its options open for higher rates arguably to 6% to cool inflation expectations. In the G-7 and the OECD, recent bifurcation appears as several raised rates while Canada and Japan opted for abeyance. Many emerging countries face crisis level inflation.
When quantitative ease was gushing, currency exchange rates were relatively and mostly sedate. Now, were more acute bifurcation in monetary policy develop alongside slow economic growth, the effect of central bank policies could be to engender currency depreciation as a domestic weakness cushion. Still in their policy frameworks stated or mooted, central banks today seem determined to avoid the mistakes of the 1970s of allowing inflation to become imbedded but also avoid monetary policy from becoming enmeshed with sustaining fiscal largesse replete with massive deficits.
The “singleness of money” assertion coined by BIS of needs involving the financial system has been reiterated during debacle in crypto currencies. U.S. Treasury fixed income yields have increased and are among the highest in advanced countries but risk assessment behooves diversification. For dollar based investors, needs include focused on short duration sovereign bonds, as well partially for instance in Europe and the U.K. but also substantially including smaller currency ones as well as on quality corporate issues. Varied monetary developments add to favoring precious metals in asset diversification.
If even mild recession were to occur, S&P 500 earnings could drop to 175 or more before a bottom is seen and valuation expansion based on recovery becomes more cogent. Meanwhile for risk premium facets based on risk free rates as alternate, inflation remains high. Rather than a value versus growth or vice versa tilts, bifurcations are likely to be those of quality of operational management, balance sheet structure, capital budgeting and cash flow management.
Equity sector rotation in Q1/2023 swung and swayed between vestiges of momentum fervor and defensiveness with Europe a beneficiary but Consumer Staples are still grappling with business restructuring and banking debacles in Europe were salutary. However, market action has engendered more conservative assessments for strong and diversified Information Technology. We expect diversification as well as back and forth between value and growth to favor U.S. leadership over that of Europe, with Japan somewhere in between. Growth in new technology demands such as 5G, security of supply and the fragility of currency systems amid inflation and war all favor an early overweighting in Materials as well as Energy, favoring Canada and Australia as well as elsewhere, including in emerging markets. These aspects may assist emerging markets remaining salient even while strong global growth is likely some time away in favoring emerging markets. Expecting more focus on basics by consumers and state of the art emphasis in government and private infrastructure, in cyclicals we favor Industrials over consumer areas. Financials are crucial for the markets with favor likely acute for those strongest and most ruthless in restructuring.
Asset Mix
Events add up to capital markets recognizing the interface between margin of safety or risk premiums and quality while also reflecting that millisecond mega data momentum is not all knowing nor all encompassing. Unfortunately, adequate focus on risk premiums or old fashioned margin of safety seems to occur mainly on reappraisals after debacles. It was mainly so even recently on both sides of the Atlantic in small and significantly larger entities in their highly regulated banking segment and likely lies obscured elsewhere. It has become popular to blame central bank policies changes. However due to prior public finance and corporate management capital budget lax, in the current environment, we believe quality of delivery and balance sheet robustness build imperatives have further to go.
Logistical weaknesses, expanding wars, ongoing pandemic and geopolitical rivalry appear long lived and of risk of further expansion. Likely to take time to address completely are logistical weaknesses that were exposed for globalized supply chains well before the present sequence of administered rate increases. Meanwhile the war in Ukraine is far from petered out and the flaring of internal and external Middle East violence has been expanding. The Covid pandemic may be less in the headlines than in recent years but remains of medical stress. Trade bloc expansion, sanctions and security concerns have expanded alongside geopolitical rivalry, notably between China and the United States. Quality of management both in operations and in financial structure are likely to be important attributes for some time.
Distinctly different from over a decade and a half of massive quantitative ease and minimalist interest rates, we believe the present environment is like to be conducive for and even enforce more stringent capital budgeting decisions upon countries and companies alike. Misjudgment of such change has actually been exacting duress for several quarters upon public finance management in several emerging countries as well as and spectacularly so upon industries from the financials to growth as well as for supposed defensives like staples. Central bank policy change and the flaring of inflation have been of impact. We expect better balance between valuation compared to the erstwhile fervor for momentum that seemed to characterize the last cycle and which flared even in parts of Q1/2023. Corrections over time rather than all at once likely mean that not a forward march but abeyance to rebuild is likely and would favor quality of management in operations and favor balance sheet robustness.
In our judgement as seen in recent global projections by the likes of the ADB, IMF, the World Bank and the OECD, recession may be only barely avoided and hence economic growth remains fragile and bifurcated. The latest inflation reports of advanced country remain distant from objectives of 2% and even stubbornly twice and even five times such levels, for instance in the U.K. Among the OECD, central bank policy bifurcation appears as well. the Federal Reserve in March 22, 2023 raised Fed Funds 25 basis points to 5.0%, leaving its options open but reiterating the potential for higher rates with the objective being the cooling of inflation expectations. Also raised on March 23 wasthe Bank of England rate to 4.5%. In mid-March, the European Central Bank increased rates by 50 basis points to 3% and pointed to more to come. Raising also have been Switzerland notably and smaller thought leaders New Zealand and Norway. Risking outlier dissonance, the Bank of Canada has now twice consecutively eschewed raising its rate of 4.5%. Bank of Japan policy has been chronically unchanged, tensing global systemic risk but new monetary leadership is in charge from April 2023 onwards. In Asia, India and Philippines have raised but the PBOC of China appears easing reserve policy, likely on real estate stresses.
Sequentially for several quarters now, the IMF and the BIS have been warning about leverage and the cost on cash flow management arising from rising interest rates. Credit assessments are likely to have a much more significant role than when quantitative ease was at its apex. It would seem that volatility has reason to remain elevated in a period still underway since 2021 of a rolling correction of expectations. Quality assessment would seem especially crucial as experienced already in parts of Swiss AT1 (CoCo) bonds and which is likely to expand. Junk corporate bond yields are already onerous. As well, in emerging market fixed income are already straining from currency risk in servicing the debt.
Central banks are likely reassessing policies incorporating interest rate increases but with bifurcation risk for capital markets. To avoid rate roulette from obscuring objectives, central banks can adjust their sequential gradient of policy. Inflation is not low in the U.S., in the OECD, globally and stratospheric in some emergent areas. As global benchmark, the Federal Reserve should meter out rate increases to 25 basis points at a time but now, with a terminal rate closer to 6% into year-end 2024 instead of 2023. When quantitative ease was gushing, currency exchange rates were relatively and mostly sedate. Now, were more acute bifurcation in monetary policy develop alongside slow economic growth, the effect of central bank policies could be to engender currency depreciation as a domestic weakness cushion.
Our assessment is that in their policy frameworks stated or mooted, central banks today are determined to avoid the mistakes of the 1970s of allowing inflation to become imbedded but also, equally important to avoid monetary policy from becoming enmeshed with sustaining fiscal largesse replete with massive deficits. The globally key U.S. Fed Funds rates are yet to peak. The U.S. budget and deficit imbroglio continues with an election due in 2024 and a mixed Congress. We regard a neutral long 10 year U.S. Treasury Note yield to be close to 5%.
While U.S. Treasury fixed income yields have increased and are among the highest of those in advanced countries, risk assessment behooves diversification. For dollar based investors, it needs to be still focused on short duration sovereign bonds as well as including for instance partially in Europe and the U.K. but also substantially in smaller currency ones as well as on quality corporate issues. The “singleness of money” assertion coined by BIS of needs involving the financial system has been reiterated during the debacle in crypto currencies. Varied monetary developments add to favoring precious metals as asset diversification.
If even mild recession were to occur, S&P 500 earnings could drop to 175 or more before a bottom is seen and valuation expansion based on recovery becomes more cogent. Meanwhile for risk premium facets based on risk free rates as alternate, inflation remains high as a risk factor. Rather than a value versus growth or vice versa tilts, we believe more paramount bifurcations are likely to be those of quality of operational management. Within balance sheet structure, capital budgeting and cash flow management also appear as requirements quite distinctly different from the attributes of management during massive quantitative ease that appeared before in favor of leverage and share buybacks in order to cater to expectations.
As equity sector market rotation in Q1/2023 swung and swayed between vestiges of momentum fervor and defensiveness, Europe was a beneficiary. Meanwhile, we see Consumer Staples still grappling with business restructuring and banking debacles in Europe were salutary. Market action has engendered more conservative assessments for strong and diversified Information Technology still with growth prospects. We expect diversification as well as back and forth between value and growth to favor U.S. leadership over that of Europe, with Japan somewhere in between. In our judgement, growth in new technology demands such as 5G, security of supply and the fragility of currency systems amid inflation and war all favor an early overweighting in Materials as well as Energy, favoring Canada and Australia as well as such exposure elsewhere, including in emerging markets. These aspects may assist emerging markets remaining in salient even while strong global growth is likely some time away in favoring emerging markets. Expecting more focus on basics by consumers and state of the art emphasis in government and private infrastructure, in cyclicals we favor Industrials over consumer areas. Financials are crucial for the markets with favor still acute for those strongest and most ruthless in restructuring.
Equity Mix
Contrary to conventional processes being at work in equity markets, the last cycle contained placements of peak P/E multiples on peak earnings. Normal behavior at the stock, sector and aggregate level includes valuation multiple compression to occur as a sense of an earnings peak or plateau develops. Yet in 2021/early 2022 and using the S&P 500 as a key global benchmark, consensus expectations appeared to be both for operating earnings sustained above 240 sequentially and rationalizations therefrom for P/E ratios of over 20x with additional rationalizations that alternate yield income opportunities were low.
In momentum surges and preferring to follow rather than lead, consensus has appeared reluctant to countenance change in addressing the implications of corporate earnings slowdown and bifurcation. Even so in reacting to corporate results in quarter after quarter sequentially, consensus has been forced to cut 2023 S&P 500 operating earnings expectations closer to 200 but with the ubiquitous 240 expectations level resurfacing now for 2024. However, if even mild recession were to occur, S&P 500 earnings could drop to 175 or more before a bottom is seen. Meanwhile for risk premium facets based on using risk free rates as an alternate metric, inflation remains high. Fed Funds rates are yet to peak and arguably could reach 6%. We regard a neutral long 10 year U.S. Treasury Note yield to be close to 5%. It would seem that in a period that has been underway since 2021 of a rolling correction of expectations, volatility has reason to remain elevated. Further and sequentially now for several quarters, the IMF and the BIS have been warning about leverage and the cost on cash flow management arising from rising interest rates. Actual debacles of size have also been experienced in sectors ranged from the financials to consumer areas.
After a prolonged period of growth and especially that of concept as well as information technology being dominant aspects in geographic and sector performance, equity market sector rotation has turned volatile. Salient into Q1/2023 has been outperformance in defensive reputed areas like Consumer Staples ostensibly on yield and concomitantly in Europe due to its heavy weightings there. There have as well, been bursts of momentum/meme and banking collapses on both sides of the Atlantic amid modern, near instantaneous versions of classical bank runs exacerbated by asset mismatch. Leverage and operating control weaknesses have been experienced in banking globally, appear chronically prolonged in Japan, ongoing in China and at crisis levels in many emerging countries. Meanwhile, from information technology to social media to aspirational consumer discretionary, as business operating duress increases, costs appear being dramatically shed.
Recent projections by major institutions corroborate that global economic growth is likely to be fractured and to exhibit treading recession type behavior. With inflation still elevated to varying degrees, central banks appear generally focused on curbing expectations from becoming embedded, even as labor strife rises. Led by the Federal Reserve, administered rates are higher and may, over time, have further to go, arguably to 6% for Fed Funds rates. Rather than value versus growth or vice versa tilts, we believe the more paramount bifurcations are likely to be those of quality of operational management. Within balance sheet structure, capital budgeting and cash flow management appearing are current requirements quite distinct from the attributes of management during the massive quantitative ease that appeared then to favor of leverage and share buybacks in order to cater to expectations.
With social media suffering business model and regulatory stress, we have underweight Communications Services with the robust yield telecommunications segment not being large enough to offset drag. During the gusts of momentum fervor regardless of valuation, we had capped at 25% our weighting stance for Information Technology. As a result of market action, it has resulted in a market weight position overall with selective favor by us for strong balance sheet Information Technology companies possessing tangible and diverse revenue streams but which also have risk of regulatory activism to contain for example over reach of artificial intelligence.
While the market expectation in intertwining Healthcare and Consumer Staples is likely linked to earnings visibility and the supposition of demand robustness and are hence often tagged jointly with being growth defensives, we would differ by overweighting Healthcare while underweighting Consumer Staples. The ostensibly defensive staples are likely to face long standing brand proliferation restructuring needs amid more recent input cost increase pressures.
We are underweight consumer areas on the assessment that consumers are likely to be more focused on basics with perforce a less exuberant facet of activity. Within commonly characterized cyclicals, with defense imperatives, security of supply and onshoring facilities build as tailwinds, we overweight Industrials (and Materials) over Consumer Discretionary. For an early overweight in Materials, there appear multiple reasons from capital market internal stresses to economic uncertainty with still elevated inflation to geopolitical tensions exacerbating security of critical supply fears to “singleness of money” and currency volatility risks favoring precious metals as alternate asset diversifications.
Potential expansions into SIFI like capital cushions, slower growth and financial industry realities engulf the critical Financials sector and have us in favor overweight in those strongest and most ruthless in restructuring focus on operations rather than leverage. Leverage to deliver yield by nonbank financial institutions has still to be tested in a full financial cycle. The recent modern versions of bank runs offer a salutary warning. We have Real Estate as underweight in facing business segment challenges, anticipating a pronged period of financing and budgeting challenges as interest rates bite but with facets like onshoring activity cushioning industrial segments.
Inflation vagaries affect central bank interest rate policies but can and have upset many a required construction cost capital budgeting calculations and could do so for clean energy facilities build. We are underweight Utilities. Instead, we favoring the Industrials vendors for new construction demand as well as strong Healthcare and Financials for income. As energy benchmark, crude oil pricing may be volatile but $70 Bbl. WTI is likely needed to support even alternate energy viabilities. In the long term business of energy, we expect advantages lie with major energy companies well used to risk analysis which is currently crucial in our general capital market assessment.
As equity sector market rotation in Q1/2023 swung and swayed between momentum fervor vestiges and defensiveness, Europe was a beneficiary. Meanwhile, we see Consumer Staple sas still grappling with business restructuring and banking debacles in Europe were salutary in Q1/2023. Market action has evolved into conservative assessments and strong and diversified Information Technology still have growth prospects. We expect diversification as well as back and forth between value and growth to favor U.S. leadership over that of Europe, with Japan somewhere in between. In our judgement, growth in new technology demands such as 5G, security of supply concerns and the fragility of currency systems amid inflation and war all favor an early overweighting in Materials as well as in Energy, favoring Canada and Australia as well as such exposure elsewhere, including in emerging markets. These aspects may assist emerging markets remaining salient even while strong global growth is likely some time away in favoring emerging markets.
Communication Services: With social media suffering business model and regulatory stress in its key segment, we have underweight Communications Services. Lately, business model stress in social media has flared markedly even as controversy expands on the efficacy of its membership scrutiny. Despite huge numbers of accounts, conversion of the same into monetary revenues has proven problematic. The advertising model has proven deficient for social media and resulted in a turn towards variations of membership. With as prosaic a necessity as revenues challenging the concept fervor long giving social media buoyancy, the companies have turned to old fashioned cost cutting. Regulatory challenges have expanded as well into fake account lax and alleged usages therefrom in political meddling. These issues appear still in expansion and hence are at best a work in progress for social media as a business. Meanwhile, telecommunications has undergone severe restructuring already but revenue gains from 5G technology appears plodding with heavy investments required upfront. Its dividend yields act as a positive investment factor but the segment is not large enough to offset drag from social media.
Consumer Discretionary: We are underweight Consumer Discretionary on the assessment that consumers are likely to be more focused on basics, perforce a less exuberant facet of activity. The prior cycle had aspirational consumer activity as dominant in advanced countries due to lower interest rates. Also, the emergent countries of Asia and others drew domestic aspirational expansion from deregulation and export prowess. Currently, employment levels may have increased, especially markedly in the United States. When adding pandemic, housing and transportation challenges into the simple dynamic of disposable income spending, we see more caution in advanced and emerging countries alike. In combination with increased online activity, many retailers appear struggling to match sales with their legacies of mall presence and the desires of different demographics, especially the millennials. Stresses include erstwhile fast expansion aspirational coffee shops and designer goods that were supposedly immune. Even mass merchandising on line retailers appear restructuring. In a potentially volatile retail environment as well as amid exchange rate challenges, there appears more potential for unpleasant surprise in consumer retailing in a slow growth environment.
Consumer Staples: Despite the Consumer Staples sector being seen as a market defensive, we are underweight in that from a business perspective, it faces operational challenges that are likely to be long lived. For many companies, brand proliferation has been a delivery millstone for several years. More recently, with the flaring of inflation and even if now subsiding, rising raw material costs and low margin dependency on high volume from revenue expansion make for management challenges. In advanced countries, even as pandemic fears subside, shelter and transportation costs are likely to engage more conservatism in other spending. For emerging country opportunities, after strict pandemic shutdowns, an interesting development appears in China. Notwithstanding a savings buildup and lowered interest rate regimes, the consumer in China appears more inclined to save rather than splurge on aspirational global brands. Afterall, just a generation ago, harder times were present. In other emergent countries, higher inflation and higher rates have also appeared as potent restraints.
Energy: We have Energy as overweight. Amid realism, rigorous delivery of ESG has become mired in controversy. Including that about alternate energy sources, expectations have been dispelled currently about politics and/or war as not being integral to the business of energy. OPEC and Russia have recently agreed to cut crude oil production in reflection of fears about demand due to weakened global economic growth. Still, smaller producers with pressing financing needs have in the past seen opportunities to increase exports whenever the major exporters pullback. Meanwhile and likely using such tactics as tankers without transponders, crude oil from Russia appears being delivered to refiners that in turn export refined products to supposed sanction applying areas, such as to Europe. Still within hydrocarbons, many countries in Europe and elsewhere recognize the importance of natural gas or LNG for their near term energy and raw material requirements. Separately, trade tensions with China have been increasing, including about solar panel exports. We view that as energy cost benchmark, crude oil pricing may be volatile but that $70 Bbl. WTI is likely needed to support even alternate energy. Given the long term nature of the business of energy, we expect advantages to lie with the major companies that have been well used to risk analysis.
Financials: We expect slower growth and financial industry realities to favor overweight advantage for the strongest Financials focused on operations rather than on leverage. Even a decade and a half since the credit crisis, restructuring is ongoing in being most favorable for those Financials most extensive and ruthless in such. A modern version of an old fashioned bank run occurred on both sides of the Atlantic and demonstrated the ease with which modern technology can be used to effect client account flows. It acutes the conundrum of the risk of being dependent on short term funds in order to facilitate long term asset positioning, including fixed income and the use of derivatives thereto. This pliability of fund movements is likely to require changes in banking practices dependent on net interest margins systemically benefitting from lags in deposit account interest rate increases compared to administered rates. More bifurcation based on operational control and management is likely. In balance sheets, it likely also means an increase capital cushions arguably akin to those globally agreed to for SIFIs ( Systemically Important Financial Institutions). Leverage and derivatives to deliver yield by nonbank financial institutions has still to be tested over a full cycle of conditions in finance but the recent bank runs offer a salutary warning about such positionings.
Healthcare: While Healthcare and Consumer Staples are often tagged jointly as being defensives, we would differ by overweighting Healthcare while underweighting Consumer Staples. While their market intertwining is a likely response to earnings visibility and the supposition of demand robustness, we assess for reasons discussed elsewhere, that the current business conditions for Consumer Staples include requirements for prolonged restructuring. For Healthcare, the Covid-19 pandemic is far from over and in likelihood, mRNA technology offers the potential for expansion into other disease treatments and cures. Innovation seems bringing biotechnology closer into alignment with the distribution prowess built up by pharmaceutical companies. Innovation in medical devices and products has been ongoing. As a result of demographics and the developments highlighted above, government and private healthcare providers (where allowed) are likely to benefit from prolonged stimulus to improve expansion and development in healthcare facilities.
Industrials: Within cyclicals, we overweight Industrials (and Materials) in preference to Consumer Discretionary (and Staples). The last cycle had attributed growth like hues to consumer activity. It was replete with aspirational spending as emerging regions like China evolved and as advanced country consumers such as in the U.S. basked in high leverage amid prolonged minimal interest rates and massive quantitative ease. As reflection of inflationary tensions, central bank policies now appear less effusive. War and exposure via Ukraine have demonstrated defense weaknesses ranged from the deliverability and ongoing manufacture of ordinance as well as in response capabilities against newer technologies such as those in drones and aircraft integration. Defense budgets have had to be increased, spectacularly so in Germany. It is so in ostensibly pacifist Japan as well as across Asia as China flexes muscles. For many industries, onshoring facilities investment likely has further to expand due to rising input costs, the demands of more efficient energy usage and, after exposure to the logistical weaknesses of globalization. Advanced and emerging countries will likely require the construction of newer state-of-the-art facilities. It is underscored by the Belt and Road initiative of China, a similar proposal in Europe and several expansions of trade blocks like the CTPP.
Information Technology: During the gusts of momentum fervor regardless of valuation, we capped at 25% weighting stance for Information Technology. As a result of market action, it has resulted in a market weight position overall. As a growth attribute, Information Technology may now have more conducive valuation for performance but other challenges loom. Much as is the case for social media now, the regulatory framework for artificial intelligence has still to evolve. Concerns exist for instance with respect to forgeries of art forms; in effect plagiarizing and false attributions ranged from academic tomes to business proposals. Artificial intelligence operations can be expected to be expected come under heavy scrutiny. Meanwhile, the cyclical aspects of semiconductors have reared again in the form of overcapacity due to slow take-ups in key segments like personal computers and potentially in the form of new onshoring facilities to counter offshore security considerations. We espouse favor for strong balance sheet companies with tangible and diverse revenue streams – a sharp contrast to the concept fervor that drove consensus in the momentum phase of the capital markets.
Materials: Favoring an early overweight in Materials appear multiple reasons that range from capital market internal stresses to economic uncertainty amid elevated inflation to geopolitical tensions exacerbating fears about the security of critical supply. In the last several quarters, there have appeared several internal capital market digressions that have included alleged scandals in crypto currencies and which have exacerbated concerns in that which the BIS calls the cornerstone of finance, namely “the singleness of money” – monetary exchange occurring at par, regardless of form and which was crucial for barter activity to yield to a monetary exchange. Holder recent risk clarity debacles have included AT1 or contingent convertible bonds. Amid economic uncertainty, central bank policies appear bifurcated with an inflation rainbow ranged from triple digits in some emerging countries threatening economic collapse to lower levels in advanced countries but still several multiples above their 2% targets. War and geopolitical tensions add to precious metals as wealth preservation alternate but also expose other issues. The realities of information technology and green economy alternates are those of critical dependency on precious, base and rare materials. These facets for example for base metals add to their more traditional cyclical roles in infrastructure build.
Real Estate: We have Real Estate as underweight due both to business segment challenges and to anticipate a pronged period of financing and budgeting challenges. In a highly leveraged business, real estate has been sensitive to borrowing costs and change in the availability of risk capital. Refinancing appears taking longer than expected of prior real estate expansions in emerging countries like China. After years of massive ease in advanced countries, there appears a less conducive central bank environment. In the fight against inflation, the cost of financing and the availability of funds is likely to cause stress. Business changes even for existing real estate properties can be seen in that erstwhile stable cash flow assumptions can no longer be made. In segments like office properties and shopping malls, there appears prolonged restructuring. Affordability and the other demands on funds for basic living expenses for example could be twin headwinds in high margin residential real estate like single family dwellings. However, new infrastructure/industrial oriented real estate activity for onshoring could be stimulated in response to the weaknesses exposed in global logistics, security concerns and intrinsic efficiency improvement business challenges.
Utilities: With their heavy upfront capital investment needs,Utilities appear sensitive to the capital cost and funds availability aspects of capital market performance. Not without reason, size of funding of such has long had an international tinge. On revenues, utilities have derived considerable benefit from being accorded an allowed rate of return by regulators and hence have been considered defensive/yield oriented investments. Still, it has not always been the case, especially during periods of major changes in economic parameters or technologies. One such took place recently in the allowed cost of electricity charges and which even resulted in bankruptcy followed by government takeover Another afflicted the nuclear power industry. Environmental requirements and source of fuel supply security considerations have resulted in major investments being required in many utility segments. Meanwhile, inflation vagaries do affect central bank interest rate policies and can upset many construction cost calculations in capital budgeting. We are underweight Utilities while instead favoring the Industrials vendors for new construction equipment demand as well as strong Healthcare and Financials for income.
Asset Mix
Global U.S.
Equities-cash 49 % 54 %
-priv. 6 6
Fixed Income 25 20
Cash 15 15
Other 5 5
Total-% 100 100
Geographic Mix
Currency/ Equities Fixed Cash
Real Income
Americas 61% 65% 67% 55%
Europe 22 20 26 37
Asia 9 13 6 3
Other 8 2 1 5
Total -% 100 100 100 100
Global U.S. Stance
Comm. Serv. 1.8% 8.1% Under-weight telco, under social
Cons. Disc. 10.2 10.1 Under-weight favor frugal
Cons. Stap. 10.7 7.2 Under-weight brand pruning key
Energy 5.4 4.6 Over-weight favor strong cos..
Financials 18.6 12.9 Over-weight, restructuring
Healthcare 11.3 14.2 Over-weight
Industrials 12.5 8.7 Over-weight, capex suppliers
Info. Tech. 20.9 26.0 Mkt.-Weight after prior cap
Materials 4.22.7 Over-weight diverse and prec.
Real Est 1.6 2.6Under-weight, favor Ind.
Utilities 2.8 2.9 Under-weight – diversify.
Total-% 100.0 100.0 StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate.