State Street SPDR ETF: Picking sectors to address market risks and opportunities

31 mei 2022

Energy investors have been keen to take advantage of higher oil and gas prices and companies that can actually benefit from a high inflation environment. Investors in the financials sector, while initially drawn to expectations of rising interest rates, have more recently become aware of the impact of flat bond yield curves.

Directionally, ETF investors have gotten this right. Whereas MSCI World Energy has returned more than 38% year to date, 51% ahead of the broader MSCI World Index, MSCI World Financials has fallen by 13%, having reached a peak price for the year so far in the second week of February.

Investors have also moved into defensive sectors, principally health care (home to equipment and service providers as well as pharmaceutical manufacturers) and, more recently, consumer staples (beverages, food and household product producers). This risk-averse move sees investors embracing the traditional havens offered by non-discretionary products and relatively low volatility of share price performance.

 

 

Barbelling energy and health care

One of the sector strategies proposed for 2022 by State Street SPDR ETF was a barbell strategy to fit a high inflation environment but with consideration for volatility. This suggestion focused on energy. Given the integral nature of crude oil prices to CPI figures and the high correlation between crude oil prices and the performance of oil and gas companies, energy is easily recognised as the sector with the highest sensitivity to inflation.

In order to reduce the day-to-day volatility, energy can be held with a sector offering divergent characteristics – in this case health care, which scores highly on stability of earnings growth and other quality measures (unlike energy) and has lower value exposure and market beta. The analysis by SPDR ETF shows that adding these two sectors to an equity portfolio could increase returns in a high inflation scenario with a reduction in risk.

The war in Ukraine, and the resulting sanctions and disruptions to Russian oil and gas delivery, continue to support tight supply, while the reopening of parts of China from harsh COVID lockdowns should drive short-term demand for fossil fuels. Energy has become less correlated to the rest of the equity markets this year, often being the only sector to produce positive returns when all other sectors are down. The disparity of earnings sentiment, with upgrades to energy earnings, but not elsewhere, suggests this situation could continue in the next few months. Energy is not expensive looking back at the last 20 years.

Meanwhile, the Q1 reporting season has gone well for health care, with large pharma in line or exceeding consensus earnings forecasts and guidance being reiterated or raised. Sales of drug treatments and vaccines for COVID have been among the highlights. State Street custody holdings indicate that institutional investors are still underweight to health care companies and have been steadily buying over the past few months. One reason for past cautiousness has been the fear of pricing pressure on prescription drugs in the US but there has been little sign of this danger for some time.

Philippe Roset, Head of SPDR ETF Northern Europe: “Another of our SPDR Sector Picks for Q2 is US industrials. So far this quarter the sector has fallen, dragged down by the market sentiment and fears around peaking PMI figures. In spite of an expected economic slowdown, which typically would hurt this sector, we see emerging tailwinds for many parts of the industrials complex and thus it could be a buying opportunity. The sector has high domestic revenues and US industrial activity may suffer less from economic slowdown. Furthermore, any orders emerging from the US’s $1 trillion Infrastructure Bill, set to build roads, bridges, airports, waterways and power infrastructure, would directly benefit companies based in the US.”