Welcome to RBC’s Markets in Motion podcast, recorded December 20th, 2022. This is Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
Today in the podcast, an update on our sector views following the publication of our December RBC analyst survey results.
Three big things you need to know: First, our analysts have a slightly positive tilt in their outlooks for performance over the next 6-12 months, as well as on other hot topics. Second, on our survey our analysts were most constructive on the performance outlooks for Health Care and Energy, followed by Tech, Utilities, and REITs, with the weakest outlooks for Consumer Staples, Industrials, and Consumer Discretionary. Third, in terms of our own US equity strategy sector recommendations, which leverages our analysts’ views as well as our own tools, we are overweight Energy, Financials, Health Care, Utilities, and Technology, and underweight Consumer Staples and Consumer Discretionary.
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Takeaway #1: Our analysts have a slightly positive tilt in their outlooks for performance over the next 6-12 months, as well as on other hot topics.
- In particular, their views on current valuations, the current state of demand, the impact of moderating inflation, future pricing power, and the impact of China’s reopening tilted slightly positive.
- Views on where margin pressures and supply chain pressures are headed were a little more mixed.
- On overall performance outlooks, one thing that jumped out to us was that they improved slightly from our last survey which was taken in October. In our December 2022 survey, performance outlooks improved at the sector level for Communication Services, Consumer Discretionary, Materials (for the 3rd survey in a row), and Utilities, but deteriorated for Industrials (for the 2nd survey in a row).
- While the overall level of optimism on performance across all sectors and industries on performance was still below December 2021 levels, the improvement was noteworthy in the context of the muted outlooks that have dominated sell-side strategy forecasts in recent weeks.
Takeaway #2: In our survey, our analysts were most constructive on the performance outlooks for Health Care and Energy, followed by Tech, Utilities, and REITs, with the weakest outlooks for Consumer Staples, Industrials, and Consumer Discretionary.
Looking at some of the other questions we asked things that jumped out were:
- Valuations are seen as most appealing in Communication Services and Utilities, and least appealing in Industrials, Consumer Staples, and Consumer Discretionary.
- Moderating inflation is seen as a positive development for most sectors. Our Tech analysts express the most enthusiasm about the impact of moderating inflation on their industries. Our Energy and Financials analysts see moderating inflation as a much less constructive development, however. We view this issue as a key risk to our overweight stance on Energy and Financials, and as supportive of our overweight on Tech.
- The end of COVID zero was seen by most analysts as neutral for their industry outlooks, though the camp that saw this as a bullish development was also sizable. Our Energy and Consumer Staples analysts express the most optimism, while our Financials and Health Care analysts express the least amount of optimism.
Takeaway #3: In terms of our own US equity strategy sector recommendations, which leverages our analysts’ views as well as our own tools, we are overweight Energy, Financials, Health Care, Utilities, and Technology, and underweight Consumer Staples and Consumer Discretionary.
- Most of these are calls that we had in place previously.
- Our Utilities overweight is new. We have upgraded this sector from market weight to overweight.
- We see our Utilities overweight as more of a tactical call given our view that the US equity market is likely to be volatile in the first half (particularly the first quarter), before finishing the year on a stronger note. The sector tends to outperform in recession drawdowns, and underperform in recession recoveries.
- In addition to a constructive outlook from our Utilities team, we like the reasonable valuations of the Utilities sector, which is only slightly overvalued on our model and well below the peaks of the summer. This stands in contrast to Consumer Staples where our valuation model is still close to peak and more elevated than what we see for any other sector.
- We also like Utilities’ high dividend yield…
- Its strong earnings revisions trends (it joins Energy as one of only two sectors with positive earnings revisions of late)…
- Its tendency to outperform during extended yield curve inversions…
- Its balance sheet profile (it has the longest average weighted maturity of any of the major S&P 500 sectors)…
- and its strong ESG profile.
That’s all for now. Thanks for listening. And please reach out to your RBC representative with any questions.