LIVE MARKETS-Rotating into growth from cyclicals with oil prices high
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ROTATING INTO GROWTH FROM CYCLICALS WITH OIL PRICES HIGH
As soaring oil prices increase the chance of slower economic growth, Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, said his firm has made the call this week to rotate out of cyclical equities and into growth stocks.
With the U.S.-Israeli war against Iran escalating in its third week, shipping is still largely restricted through the Strait of Hormuz, through which about 20% of global oil supplies typically need to pass.
While they have come off their highs, the bottleneck has kept oil prices far above pre-war levels. U.S. crude oil last traded around $98 on Wednesday compared with a settlement close of $67 on February 27, while Brent was last trading near $109 after closing under $73 just before the war started.
Besides the uncertainty of how long the Middle East fighting continues, Janasiewicz said, in an interview with Reuters, that he is working with the premise that energy prices stay higher for longer as he argues that military action is "not going to solve the Strait of Hormuz" problem.
With this, the strategist sees a "higher risk premium that gets embedded in oil markets going forward," creating ramifications for the broad economy.
With an already soft labor market going into the war, a lot of people had been banking on tax refunds providing a boost to the consumer. But now the strategist sees this being "completely offset" by higher gas prices.
"That idea of the consumer getting a bump is probably shot. And then do you have to assume that prices at the pump stay elevated for longer? Maybe they come down, but they are still higher than what they were," he said.
Added to softening in the jobs market and real wage growth, he said: "The consumer is going to get pinched a little bit so you can see the knock-on effects."
With this in mind, his firm has made portfolio changes.
"If we're going to see a slower economy, it's the market idea of scarcity. We’ll bid up scarcity so, if growth is slowing, growth is becoming more scarce," said the strategist.
“We’re rotating out of cyclicals more into the growth segments of the economy and that also includes moving out of small caps because small caps would be more of a cyclical bias," he said. "So we’re moving from small caps back to large caps. We took a little bit of money out of international developed, specifically with Europe because Europe’s much more cyclically focused. Then we put some money into Latin America and into China."
Cyclical sectors that the strategist is moving away from are industrials, financials and materials while he sees the so-called Magnificent 7 megacap stocks as "a defensive trade."
The Roundhill Magnificent 7 ETF MAGS.K and the S&P 500 technology sector .SPLRCT have both fallen more than 11% below their October closing records as investors have been worried for months about the massive jump in spending required for booming artificial intelligence demand on top of fears around competition disruption from AI.
But Janasiewicz reminds us that large-cap technology stocks were market darlings coming out of the Covid pandemic because "they had cash on the balance sheet, excellent earnings, and fat margins."
"Those things are still there. It's just that everybody got caught up in this AI worry and repriced the market," he said pointing to the recent selloff in the sector as a tailwind, "It still keeps you in the market, but you've got some cushions built in from valuations being rerated."
(Sinéad Carew, Lewis Krauskopf, Caroline Valetkevitch)
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