Equity performance this year has been driven by a flight to income in a post-Brexit, low interest rate, low growth environment. As a result, sectors that have an income focus, such as utilities and telecommunications, have been among the top-performing this year. In addition, energy has done well due to a rebound in oil and natural gas prices.
Global Equity Performance
MSCI All Country World Index – YTD Sector Performance
Source: MSCI – data as of July 25, 2016. Past performance does not guarantee and is not indicative of future results
Identifying Sources of Opportunity
Looking ahead, global growth should benefit from aggressive fiscal stimulus in the UK and Japan, as well as additional monetary stimulus in the Eurozone and increased infrastructure spending in the United States. If this forecast is correct, investors may have an opportunity to adjust their asset allocations with the following outcomes in mind:
- A reduction in exposure to interest rate sensitive sectors such as telecommunications and utilities, and an increase in exposure to less interest rate sensitive sectors such as health care, technology and high-quality financials, which should perform well in a rising interest rate environment.
- An Increase in commodity exposure. Most commodity prices are above their 200-day moving averages and are likely to move higher, along with a general increase in inflation.
- Stronger emerging market currencies as commodity prices strengthen.
- A steeper yield curve, reflecting higher inflation expectations.
While the probability of this more inflationary scenario is not currently high, it has increased since the Brexit vote and the election in Japan. What makes it interesting is that the markets are not pricing in this possibility.
A Cautious Outlook
We are cautious on the outlook for global equities overall in the face of relatively high valuations and economic and political uncertainty. But the recent sell-off in UK and European equities has created investment opportunities in those regions for investors with a mid- to long-term outlook. In addition, we believe the health care and technology sectors in the US look attractive due to strong earnings performance and a positive long-term outlook.