Picking Sectors to Address Market Risks and Opportunities
Many ETF investors have been getting it right with their moves in sectors this year. Sector ETF trades show continued net flows into energy and defensive sectors such as health care and consumer staples and avoidance of financials.
We believe the SPDR Sector Picks of energy and health care remain attractive relative to other sectors.
For those investors looking to take advantage of recent share price falls, US industrials represents an opportunity.
So far this year, two sectors stand out in terms of flow trends. Energy has gathered significant net new assets week by week, much greater as a proportion of the sector’s market capitalisation than any other sector. Financials (including heavily traded bank ETFs), by contrast, saw strong net inflows for the first six weeks of the year then a rapid turnaround and significant outflows since. Both of these trends have been driven by the strong influence of macroeconomic factors on today’s equity market.
Energy investors have been keen to take advantage of higher oil and gas prices and companies that can actually benefit from a high inflation environment. Investors in the financials sector, while initially drawn to expectations of rising interest rates, have more recently become aware of the impact of flat bond yield curves.
Directionally, ETF investors have gotten this right. Whereas MSCI World Energy has returned more than 38% year to date, 51% ahead of the broader MSCI World Index, MSCI World Financials has fallen by 13%, having reached a peak price for the year so far in the second week of February.
Investors have also moved into defensive sectors, principally health care (home to equipment and service providers as well as pharmaceutical manufacturers) and, more recently, consumer staples (beverages, food and household product producers). This risk-averse move sees investors embracing the traditional havens offered by non-discretionary products and relatively low volatility of share price performance.
Sector Flows YTD and Past Month (in USD Millions)
Barbelling energy and health care
One of our sector strategies proposed for 2022 was a barbell strategy to fit a high inflation environment but with consideration for volatility. Our suggestion focused on energy. Given the integral nature of crude oil prices to CPI figures and the high correlation between crude oil prices and the performance of oil and gas companies, energy is easily recognised as the sector with the highest sensitivity to inflation.
In order to reduce the day-to-day volatility, we suggested holding it with a sector offering divergent characteristics – in this case health care, which scores highly on stability of earnings growth and other quality measures (unlike energy) and has lower value exposure and market beta. Our analysis shows that adding these two sectors to an equity portfolio could increase returns in a high inflation scenario with a reduction in risk.
We still find this to be an effective combination.
The war in Ukraine, and the resulting sanctions and disruptions to Russian oil and gas delivery, continue to support tight supply, while the reopening of parts of China from harsh COVID lockdowns should drive short-term demand for fossil fuels. Energy has become less correlated to the rest of the equity markets this year, often being the only sector to produce positive returns when all other sectors are down. The disparity of earnings sentiment, with upgrades to energy earnings, but not elsewhere, suggests this situation could continue in the next few months. Energy is not expensive looking back at the last 20 years.
Meanwhile, the Q1 reporting season has gone well for health care, with large pharma in line or exceeding consensus earnings forecasts and guidance being reiterated or raised. Sales of drug treatments and vaccines for COVID have been among the highlights. State Street custody holdings inform us that institutional investors are still underweight to health care companies and have been steadily buying over the past few months. One reason for past cautiousness has been the fear of pricing pressure on prescription drugs in the US but there has been little sign of this danger for some time.
Play the themes of food security, fuel and supply chain with industrials
Another of our SPDR Sector Picks for Q2 is US industrials. So far this quarter the sector has fallen, dragged down by the market sentiment and fears around peaking PMI figures. In spite of an expected economic slowdown, which typically would hurt this sector, we see emerging tailwinds for many parts of the industrials complex and thus it could be a buying opportunity. Among the themes that can be played in this sector are:
Expected increase in defence spending in Europe and elsewhere, featuring orders for under-resourced attack helicopters, airlift capabilities and missile systems
Demand for the machinery necessary in power generation and renewable energy transition projects as countries look to energy security
Elevated crop prices extending the agricultural cycle; the need for food security could boost demand for agricultural machinery
Rising demand for mining machinery in response to high metals and minerals pricing
Likely increase in demand for drilling equipment after years of constrained capital expenditures by oil producers, which would benefit producers and associated transportation in the sector
Need for automation and robots for companies looking to re-shore manufacturing facilities into countries experiencing full employment
Our preference remains US industrials, partly because this sector has high domestic revenues and US industrial activity may suffer less from economic slowdown. Furthermore, any orders emerging from the US’s $1 trillion Infrastructure Bill, set to build roads, bridges, airports, waterways and power infrastructure, would directly benefit companies based in the US.
How to access this theme
Investors looking to play these sector themes can do so with SPDR ETFs. To learn more about these ETFs, and to view full performance histories, please click on the links below to visit their fund pages.
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DE SPDR-ETF'S VAN SSGA ZIJN MOGELIJK NIET BESCHIKBAAR OF GESCHIKT VOOR U. DE UITGEDRUKTE MENINGEN/INFORMATIE OP DEZE SITE VORMEN GEEN BELEGGINGSADVIES, FINANCIEEL, JURIDISCH, REGLEMENTAIR, BOEKHOUDKUNDIG OF BELASTINGADVIES. BIJ TWIJFEL DIENT MEN STEEDS ONAFHANKELIJK ADVIES IN TE WINNEN. DE INFORMATIE NOCH ENIGE OPINIE OP DEZE SITE VORMT EEN VERZOEK OF AANBOD VOOR DE AAN- OF VERKOOP VAN AANDELEN VAN DE FONDSEN OF ENIG ANDER FINANCIEEL INSTRUMENT.Standard & Poor’s®, S&P® en SPDR® zijn gedeponeerde handelsmerken van Standard & Poor's Financial Services LLC (S&P); Dow Jones is een gedeponeerd handelsmerk van Dow Jones Trademark Holdings LLC (Dow Jones); en deze handelsmerken zijn in licentie gegeven voor gebruik door S&P Dow Jones Indices LLC (SPDJI) en in sublicentie voor bepaalde doeleinden door State Street Corporation. De financiële producten van State Street Corporation worden niet gesponsord, bekrachtigd, verkocht of gepromoot door SPDJI, Dow Jones, S&P, hun respectieve filialen en externe licentiegevers, en geen van deze partijen doen enige verklaring over de raadzaamheid om te beleggen in dergelijke producten, noch aanvaarden zij enige aansprakelijkheid in verband hiermee, inclusief voor fouten, weglatingen of onderbrekingen van een index.
SPDR-ETF's mogen enkel worden aangeboden en verkocht in rechtsgebieden waar dat is toegelaten in overeenstemming met de geldende regels.
Informatie met betrekking tot Mexico
Deze informatie is geen marketing of aanbieding van effecten en is niet ook niet zo bedoeld, en mag bijgevolg niet als dusdanig worden opgevat. De fondsen waarnaar in dit document wordt verwezen, zijn niet en zullen niet worden geregistreerd onder de Mexicaanse wet op de effectenmarkten (Ley del Mercado de Valores) en mogen in Mexico niet aan het publiek worden aangeboden of verkocht. De documentatie met bekendmakingen in verband met een van de bovengenoemde fondsen mag niet openbaar worden verspreid in Mexico en aandelen van de fondsen mogen niet worden verhandeld in Mexico.
SSGA SPDR ETFs Europe I Plc en SSGA SPDR ETFs Europe II Plc zijn beleggingsmaatschappijen met variabel kapitaal opgericht als fondsen met afzonderlijke aansprakelijkheid tussen de compartimenten volgens de wetten van Ierland en erkend door de Central Bank of Ireland conform de Europese verordening van 2011 over instellingen voor collectieve belegging in effecten. U moet het prospectus en de essentiële beleggersinformatie (KIID) met betrekking tot specifieke SPDR-ETF's aanvragen en zorgvuldig lezen alvorens u belegt. Voor meer informatie en het prospectus/KIID met de kenmerken, kosten en risico's van SPDR-ETF's kunt u nu een prospectus of KIID downloaden, of kunt u deze documenten verkrijgen bij uw financieel adviseur of bij uw lokale SSGA-kantoor.
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Alvorens u belegt, moet u de beleggingsdoelstellingen, risico's, vergoedingen en kosten van de fondsen in overweging nemen. Een prospectus met deze en andere informatie kunt u downloaden of aanvragen bij uw financieel adviseur. Lees het zorgvuldig alvorens te beleggen.
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