State Street SPDR ETFs: Investing through uncertainty

State Street SPDR ETFs: Investing through uncertainty

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State Street SPDR ETF’s published its Q1 Sector & Equity Compass ‘Investing Through Uncertainty” and selects Health Care, Energy and Financials as top sector picks for the first quarter of 2023. From a regional perspective, the ETF platform of State Street Global Advisors focusses on emerging markets equities, US large- and mid-caps and FTSE all-shares...

Q4 2022 saw bonds and stocks bounce and a decline in the US dollar, implied volatility and credit spreads on hopes of inflation rate topping out and a reduction in terminal rate expectations. Following that strength, markets start 2023 vulnerable to disappointment. If “pivot” was our word for last quarter, the word is now “bumpy”, according to Rebecca Chesworth. Equity ETF Strategist at State Street SPDR ETFs. “While negotiating a difficult outlook, we believe upside could present itself,” she adds.

The year has ticked over but the SPDR Sector Picks are largely unchanged – sticking to what has been working, which are Health care, Energy and Financials:

  • Health care: Health care produced significant relative outperformance in 2022. State Street Global Advisors isn’t expecting this popularity to change in Q1 this year. While there are input cost pressures for health care manufacturers and distributors in labour and raw materials, they are not as troublesome as lower margin businesses or heavy energy users.
  • Energy: The energy sector outperformed every quarter in 2022 across each region. A return to normality in industrial and consumer/travel use will become an important element of this year’s story. A rise in Chinese usage helps offset weakness in oil and gas demand in Europe.
  • Financials: The sector outperformed in Q4 on the realization that rates would keep rising for some time. This boost to banks’ net interest income margins has fed through to relatively strong earnings sentiment and lower volatility than other sectors. Lending will likely slow and bad debts rise this year, but comfortable balance sheets and tight funding positions enforced by banking and insurance regulators provide reassurance. Eurozone and UK banks face a more challenging outlook with regard to a deeper recession than in the US, but the valuations are cheaper.

“While the backdrop remains challenging, we see opportunities in equity markets that investors can extract,” Rebecca Chesworth says. “The U-turn in China could be a pivotal moment for emerging market equities, while the UK FTSE All Share sector breakdown is almost tailored for the current environment. Investors who require more defensiveness against economic slowdown could turn to US equities,” she continues.