With the increase in volatility and uncertainty over the past couple of months, we have seen some returning to the 'risk on-risk off' trade that dominated the investment landscape though much of last year. Tactical investors are questioning whether this is the start of a renewed trend that sector and stock selection lose their importance and the focus returns to broad asset classes based on the risk levels at any particular time.

We believe this is a short-term phenomenon and that there will still be the opportunity for added value through tactical sector moves. The economic recovery/expansion is well established at this point, leading to market participants looking for more specific opportunities within the equity asset class. Additionally, while fear was elevated during the recent events in Japan and the Middle East, confidence in the economy seems to be more established than it was a year ago, leading to a reduced likelihood of a return to the broad asset class moves we saw on a sustainable basis a year ago.

So what does this mean for investors? For those tactical investors that make adjustments in portfolio allocations in an attempt to boost returns, it means that sector selection can be critical. To that end, we have recently adjusted our sector recommendations to reflect the current economic environment.

We reduced our rating on the consumer discretionary sector as we believe that as a so-called 'early cyclical' group, the consumer discretionary sector tends to perform well at the initial stages of an economic recovery. At this point, we believe we’re now well past that and into a maturing phase of economic expansion, where investors may look to rotate money out of the discretionary sector. Therefore we are reducing our rating on the consumer discretionary sector from market perform to underperform, with retailers facing an increasingly difficult environment. Through rising commodity costs and little pricing power, it seems likely that margins could be squeezed. Additionally, those risking commodity costs also affect the amount of money consumers have to spend on discretionary items.
 
Offsetting this move, we boosted the rating of the financial sector to marketperform from underperform. The financial sector received a boost recently, as the Treasury department allowed many large banks who had been participants in TARP to begin/increase dividend payments. This helps to reinforce our belief that the financial sector is stabilising and that our decision to upgrade the group to maketperform was a good one. Additionally, increasing loan demand at the business level should help to bolster profits, while more robust merger and acquisition activity and an increase in IPOs should provide more revenue.

In addition to these two changes, we continue to hold our outperform recommendation on energy, but we suggest investors who may now have outsized positions after the recent run look to take some profits as we could see a near-term pullback.  Information technology also maintains an outperform rating. At the other end of the spectrum, along with the downgrade of consumer discretionary, the consumer staples sector continues to be rated at underperform. Healthcare, industrials, materials, telecommunications and utilities all continue to hold a marketperform rating.

Our recommendations can and do change quickly at times as we continually monitor economic progress and specific factors influencing individual sectors.

Kully Samra is UK branch director at Charles Schwab.