As per BCA Research, recent revisions to U.S. economic data suggest that the odds of a recession have decreased, and the economy is stronger than previously assumed.
This outlook demands a pivot from defensive sectors like Utilities and Telecoms, which typically provide downside protection in a downturn, to more growth-oriented and economically sensitive sectors that tend to thrive when economic momentum persists.
BCA Research recommends increasing exposure to sectors that benefit from economic strength, such as Energy and Technology, while reducing allocations in sectors that are traditionally favored during economic slowdowns.
The strategic emphasis is on positioning for a “no-landing” scenario where economic growth is sustained and monetary easing could potentially lead to overheating, rather than a recession.
Defensive sectors such as Utilities and Telecoms were favored over the past quarters as investors anticipated a slowdown or recession.
However, given the stronger-than-expected economic data, the value proposition of these sectors is now less compelling.
BCA suggests booking profits in these areas and shifting to sectors with higher potential upside.
The brokerage has upgraded Energy to a tactical overweight position. This decision is based on a combination of geopolitical factors, such as heightened tensions in the Middle East, and an expectation of a resurgence in demand driven by sustained economic activity.
Moreover, recent increases in oil prices and a firm dollar also support this call.
While Technology faced headwinds earlier in the year due to high valuations, BCA now sees value in this sector, especially given its recent underperformance relative to other cyclical areas.
With a neutral stance, they flag opportunities within Software and Hardware segments, which appear oversold and may benefit from a renewed growth outlook.
Consumer Discretionary and Industrials, which typically benefit from strong consumer spending and business investment, are positioned to outperform in a sustained growth scenario.
This includes segments like retail and travel, which are tied to consumer strength and services demand.
The backdrop of stronger-than-expected economic data, alongside easing measures and a steady labor market, suggests that investors should be prepared for the possibility of higher inflation and upward pressure on bond yields.
This environment favors sectors that are positively correlated with rising economic activity and commodity prices.
However, the shift in strategy comes with caveats. BCA warns that a “no-landing” scenario could eventually morph into an overheated economy, requiring a rapid reversal in monetary policy stance.
This would potentially introduce volatility into growth sectors. As a result, they advise tactical rather than long-term overweights in these areas, particularly Energy, and to remain nimble in adjusting positions as new data emerges.
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