2023-10-20 12:34:18 ET
Jefferies’ USA Equity Strategy report, published on Thursday, showed its allocations and recommendations for the market’s sectors in terms of weight.
Overweight:
The healthcare sector ( XLV ), including tools and devices, and biotech, has seen an “awful absolute and relative performance,” indicating a rebound. In addition, merger and acquisitions activity is ahead of the average for the sector. It is also not as economically sensitive as other sectors.
The materials sector ( XLB ) has seen an increase in spending on infrastructure and a better housing market, but a weaker global economy growth, and data on China stronger than sentiment, the report said.
Real estate ( XLRE ) is not as economically sensitive as other sectors and has diversified industries across groups. However, the negatives include higher cost of borrowing and worries about drags in the commercial and office sides.
With energy ( XLE ), supply is constrained, and it is driving the prices up. Higher oil prices and higher natural gas prices. In addition, it is a cheap group with good balance sheets.
Market weight:
The industrials sector ( XLI ), Jefferies said is “not as macro driven as one would expect.” The sector is the third most expensive group in the small caps, and it is overly owned by “Long-only” type of investors. But revisions have made it head up with 2023 estimates.
The financial sector ( XLF ) has had a good earnings reporting season. It is the cheapest group that is trading below their books, and the higher-for-longer rate environment could help the sector. Bond portfolios have had losses, however.
In the discretionary sector ( XLY ), consumer spending has been holding up, but a hard landing could “adversely impact” how consumers respond. In addition, even higher oil prices and student loan repayments could negatively impact the sector.
Underweight:
The info tech sector ( XLK ) has seen a strong M&A, a stronger dollar, and estimates have stopped falling, with revision ratios turning up, the report said. The sector is the second most expensive group in the small caps. Also, investors are “incorrectly running pandemic playbook.”
Staples ( XLP ) do perform well when volatility rises. The sector has become cheaper and revision ratios have picked up. Their balance sheets are weak, however, and they are still the fourth most expensive group in the small caps.
For the communications services ( XLC ), the higher-for-longer environment should help, but it still has too many non-earners.
And finally, the utilities sector’s ( XLU ) performance has been very weak and could see a bounce, but it is the most expensive group and dividend yields are below treasuries. The sector, however, holds up well in a volatility market when GDP is weak.
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For further details see:
Healthcare, materials, real estate, and energy overweight by Jefferies