EUR 87.87 For Business Accounts Only

Int'l Macro Vision: Sector Synopsis

Int'l Equity Strategy



Without a doubt, the story of 2021 has been an accelerated Sector and style rotation from growth to value, supported by rising global yields and a global economic recovery. Though we have suggested a gradual shift toward value for months, we believe this value/reflation/reopening theme is likely to continue outperforming moving forward and we are shifting to overweight value globally. At the same time, rapidly rising interest rates have turned into a headwind for major global indexes – and for growth stocks in particular. As a result, we see the major global indexes (MSCI ACWI, ACWI ex-US, EM, and EAFE) as currently going through a consolidation phase. We need to see some stabilization in interest rates in order for growth stocks and the major averages to find some support. While we cannot say precisely how deep this pullback will be, market dynamics tell us the pullback is likely to be contained and therefore should be viewed as a buying opportunity. Important support levels we are watching include $90 on the MSCI ACWI (ACWI-US), $53 on MSCI ACWI ex-US (ACWX-US), and $52 on MSCI EM (EEM-US). If these indexes are above the respective levels we are constructive from a price perspective, however breakdowns would mean additional downside ahead. As always, we will be monitoring market dynamics closely for signs of weakness. Below we summarize the basis for our constructive outlook.

What supports our constructive outlook? (1) Not one broad global index (MSCI ACWI, ACWI ex-US, EAFE, or EM) is breaking below key horizontal support, (2) defensive Sectors such as MSCI ACWI Consumer Staples, Utilities, Health Care, and Real Estate continue to make lower highs in terms of relative strength, (3) cyclical Sectors such as MSCI ACWI Energy, Financials, Materials, and Industrials are outperforming, (4) small-caps remain leadership in the US and non-US markets, (5) high yield spreads in the US and Europe continue to make lower highs and remain devoid of bullish inflections, (6) commodities (Bloomberg Commodity Index, WTI & Brent crude oil, and copper) remain bullish, and (7) we see recent Sector rotation into value areas as healthy. These are all signs of a risk-on environment, and one where a constructive outlook is appropriate.

What concerns us? On one hand, rising global yields tells us the bond market is expecting robust global growth looking out 3-6+ months, which is certainly a positive. On the other hand, the rapid ascent of interest rates that we have seen (i.e., the rate of change) is the real concern as it could be taken as a signal that inflation is becoming a concern. Second, the US dollar (DXY) is bullishly inflecting as is now above 92; we see this as a risk-off signal considering the recent strong negative correlation between the DXY and global equities. Additionally, it goes without saying that any number of the bullish items listed in the above paragraph could take a turn for the worse, which would negatively affect our outlook.