Going global

With the investing landscape seemingly becoming more global in nature as time goes on, a question I’m often asked is how to handle tactical overweights or underweights of sectors given a portfolio with more international flavour. As those of you who have moved to a global equity benchmark, such as the Standard & Poor's Broad Market Index (S&P Global BMI), have noticed, there are some differences in the US domestic and international weighting of sectors. For example, materials makes up over 8 per cent of the global index and only 3 to 4 per cent of the US domestic index. How should an investor use Schwab’s rating in the context of a more globally oriented portfolio?

First, our sector ratings are strictly focused on the US domestic situation within the US for now. Of course, with some sectors, similar factors affect both global and local performance. Technology, for instance, participates in a largely global marketplace, and many of the economic factors affecting US companies can also impact international firms. However, in a sector like telecommunications, there can be quite a few differences due to differing local customs, laws, and regulations that can make extending the US domestic call globally potentially hazardous.

This week we are focusing on both the outperforming and underperforming sectors. After a period of economic disappointments, we're seeing a modest acceleration in US economic activity that we believe will continue and that should benefit the industrials sector. As a result, we are maintaining our view on the industrials sector at outperform. As for information technology, the fundamentals of this group appeals to us. We believe those who remain invested in this sector will be rewarded with outperformance in the coming months.

The sectors that continue to remain at an underperform rating are consumer staples and utilities. We have kept consumer staples at underperform because the sector has lagged the overall indexes to start 2012 as money throughout January appeared to rotate from more defensively oriented groups, such as staples, to cyclical groups. With economic data improving and recession fears appearing to fade, investors seem to be inching into traditionally aggressive sectors in the hope of improving their portfolio return potential. As for utilities, investors have appeared to pare back on defensive sectors like this one. It was the worst performing sector in January, and investors have moved into more cyclically-oriented groups.

As sectors and the vehicles for investing in them continue to develop globally, we hope to expand our sector recommendations to a global context when we feel it has the potential to add value to investors. For now, our sector calls remain firmly US domestic in nature.

As well as the outperform and underperform ratings detailed above, we continue to hold a marketperform rating on consumer discretionary, energy, financials, healthcare, materials, and telecoms. Our recommendations can and do change quickly at times as we continually monitor economic progress and specific factors influencing individual sectors, so check back often.

Kully Samra is UK branch director at Charles Schwab