The combination of rising interest rates and a looming recession are making a challenging year even harder for equity investors.
In terms of large-cap stocks, Tiffany Li, director at Rothschild & Co Asset Management in New York, said long-duration stocks have experienced multiple compressions, especially within the technology sector. While rising rates are typically good for banks, Li said the threat of a looming recession has weighed on the sector.
Regardless, she hasn’t made many significant portfolio adjustments. Instead, Li looks to the manufacturing, energy and health-care sectors for opportunities.
Within manufacturing, given ongoing geopolitical tensions, Li has remained overweight in aerospace and defence, although she said she has shifted exposure incrementally towards aerospace.
For energy, because of supply limitations, Li favours stocks that have attractive relative valuations and generate a lot of free cash flow. She also said she trimmed some energy exposure after the sector’s outperformance earlier this year.
For health care, Li likes health-care services and pharmaceuticals.
“At a higher level, while we had hoped this year would mark a return of stock picking, so far it’s a market primarily dominated by the macro and significant sector dispersion,” Li said.
Still, with the material drawdown across U.S. equities during the first half of 2022, “the bargain bin is once again filling up with great companies, particularly within the cyclical and growth sectors.”
As such, she said the most effective way to generate consistent alpha for clients is to keep a balanced portfolio of attractively valued large-cap stocks that generate cash flow, have high return on capital and enjoy competitive advantages.
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