Several managers believe energy and financial services are attractive.
Speaking about the energy market, Amundi's Murray says despite higher oil prices, energy companies have been slow to increase capital spending. This is out of concern they will not earn an attractive return on investment, given the global shift towards alternative energy.
He says: “We believe the underinvestment will result in an extended pricing cycle for energy, which will support earnings for energy companies as well as the stocks.”
Many financial services companies, meanwhile, are benefitting from wider net interest margins as interest rates increase, he points out.
Murray adds: “While credit quality will inevitably weaken as the US economy slows, the credit risk to the higher quality financial services stocks in our view is minimal.”
Cautious approach
Diversification means trying to balance the opportunities against the risks to US equities, of which the biggest are high and persistent inflation, rising interest rates, slowing growth, a strong dollar, and margin pressure from companies forced to raise prices due to higher input costs.
For Columbia Threadneedle’s Smith, this earnings season is going to be “especially important”.
“We are looking for it to shed some light on how companies are navigating these many and varied issues,” he says.
Fidelity is taking a cautious approach; in general, Fidelity Solutions and Multi Asset funds remain defensively positioned, with cautious views on the outlook for equities and fixed income overall, given a deteriorating macroeconomic backdrop – but it prefers US equities to other regions.
Akbar explains why: “Despite stubborn inflation and a hawkish Fed, data in the US seems to be holding up more resiliently than the UK or Europe.”
Within a US allocation, it makes sense to avoid areas such as technology and to pay particular attention to valuations over the coming months, she says, as we move through the current earnings season.
She points out: “In many areas of the market, while broad equity indices are down significantly from their previous highs, a closer look suggests the deteriorating macro picture is not yet priced in, posing further potential downside.”
At this stage, Fidelity sees US equities as attractive relative to other regions, but would be cautious on adding significant equity risk overall to portfolios.
