Kully Samra, of US financial services firm Charles Schwab, explains why he’s caught in two minds over his defensive positioning.
We remain slightly defensive with our sector recommendations but we're a bit concerned over doing so. We believe this is the appropriate positioning given the continued uncertainty in the market, combined with sluggish economic data.
But some defensive areas appear extended and the possibility of a near term cyclically-based rally exists. We believe that we will get an upward move in the cyclical sectors sometime in the near future, but think that we're still weeks away from such a potential move.
With Congress and many European policymakers on holiday, and earnings season complete, finding a catalyst for a substantial move may be more difficult. Investors still seem to be leaning toward the defensive areas of the market, despite the decent run they've had recently, and we are sticking with our slightly defensive stance.
We also note that the few defensive sectors that appear most extended and potentially overvalued (telecom, consumer staples, and utilities) are still only rated neutral for us.
As a result, our portfolio is only modestly defensive, with materials and industrials rated underperform, and healthcare and technology rated outperform. Despite the current negative view on industrials, we believe companies are at the point of needing to start replacing and updating equipment, potentially benefitting the sector.
On the flipside, we've liked the healthcare sector for some time now as the fundamentals of the group have remained attractive to us. But we were hesitant to move to an outperform rating as investor interest in the group was lacking, potentially because of the legal uncertainty surrounding the Affordable Care Act.
Now the dust has cleared from the legal front, and concerns are elevated regarding economic growth, we believe the traditionally defensive healthcare sector will become more attractive and recently upgraded the group to outperform.
We are aware that there is the possibility of a near-term rebound in more cyclical areas of the market, but believe that any such rallies will be short-lived due to a lack of fuel for an extended move. However, we are watching carefully and are prepared to move quickly if conditions should change.
In addition to the above ratings, we continue to hold a marketperform rating on the consumer discretionary, consumer stables, energy, financials, telecom and utilities sectors and an outperform rating on the information technology sector.
Kully Samra is UK branch director at financial-services firm Charles Schwab.