Equity Strategy: USD strength - equity implications; The barbell of Defensives and Energy remain our key preferences

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy

 

In addition to the move up in energy prices and elevated bond yields, renewed USD strength is another factor that the equity market needs to digest. Last October, USD peak coincided with the equity trough, and the more mixed equity performance in the past few months is coinciding with USD bottoming. Almost always in the past, when USD is strengthening, global equities have been under pressure. Our FX team is bullish on the USD over the next 3-6 months, vs all major crosses. If that comes to pass, equities in general could stay under pressure. Regionally, a stronger USD has typically meant the outperformance of Japan, Switzerland and the UK, in local currency, given their large export exposures. When assessing the performances in common currency, US equities are the top performers in times of USD strength, even with a headwind to the exporters, and Japan stays the outperformer, in the regional context. EM is an underperformer, and it is Eurozone that moves to the bottom of the pecking order. EM are lagging DM this year by 10%+, and from our equity strategy perspective, we remain cautious on EM. Broadly, in terms of sector tilts, we continue advising a barbell of commodities – OW Energy – together with a low beta exposure, such as Staples and Utilities, and that could track even if bond yields keep going higher in the near term. European Healthcare could be interesting, as well, as it tended to work well with a strong USD. Thematically, we maintain our longstanding preference for FTSE100 over FTSE250 that we initiated in November ’21. In terms of equity market levels, our index target of 4150 for SX5E has not changed over the last 12 months, since it was initiated. Stocks are at present below it, but we expect continued undershooting of the targets in the near term.

This podcast was recorded on 22 October 2023.

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