We took profits on the majority of our risky cyclical stock positions last week after turning more cautious on the near-term outlook for the market.
Our view chimes with that of eToro Market Strategist Ben Laidler: “A resilient US consumer, plunged EU natgas, and reopening China has cut growth risks. But sticky inflation is raising bond yields and is a valuation ceiling. Whilst depressed investor sentiment, that added fuel to the rally, is now ebbing.”
Investor sentiment measures, which were highly depressed in October, have indeed turned neutral. Sentiment is not yet bullish, which suggests further upside may be available over the next 1-2 months, but risks are more two-sided than before.
At the same time, interest rates have increased this month, reversing their January fall. Interest rates are now unchanged for the year and no longer provide a tailwind for stocks.
Higher US interest rates have strengthened the US dollar, which has weighed on global liquidity. It appears that the market has overshot its liquidity-implied fair value.
None of these indicators – sentiment, liquidity, interest rates – predicts the stock market perfectly, or even with a high degree of accuracy if used in isolation. And since sentiment is not yet bullish, we do not get a clear sell signal. Regardless, we feel that the balance of risks has deteriorated sufficiently that it makes sense to move from an aggressive towards a neutral portfolio positioning.
The new positions in the portfolio are from the defensive Telecom, Healthcare and Consumer Staples sectors. They are value stocks with high free cash flow yields. The high cash flow yields should make these stocks resilient against increases in interest rates.
The banks Deutsche Bank, Danske Bank, Banco Santander, BNP, ING, Bancolombia, Intesa, Natwest and Lloyds were sold. The auto companies Volkswagen and Stellantis and the insurer AXA were also sold.
They were replaced by the telecom companies Orange, Telefonica Brasil, Vodafone and BT, the tobacco companies Imperial Brands and British American Tobacco, and the pharmaceutical companies Roche, Novartis and Bayer.