PARTNER INSIGHT: Andrew Cole, Head of Multi Asset London at Pictet Asset Management, discusses the value case of sectors and themes.
Which economy will grow faster this year: the Eurozone or the US? Which central bank will surprise markets the most? Fund managers spend an inordinate amount of time debating these issues and their implications for asset classes in different regions. But in fact, there hasn't been much divergence in economic and monetary cycles for some time. We are in a period where global growth has finally synchronised, while policies have become broadly aligned.
As a result, differentiating between countries hasn't really helped drive investment performance, with share price moves dictated more by individual companies' earnings. In this environment, we believe there are much better opportunities for alpha generation to be had from looking at asset allocation by global sector rather than by region.
Both our market analysis and the attribution of our own portfolio returns support this view. The average 12-week dispersion of returns within the MSCI All-Country World Index the extent to which earnings differ from the mean - shows that sectors have been increasing in importance relative to regions.
Indeed, this trend has been in place for much of the past three years. Furthermore, quarterly rolling correlation of share price performance in different regions is hovering around its long-term average. Correlation between sectors, in contrast, has been heading lower and now stands at just 52 per cent - meaning sector indices move in tandem with each other only around half the time - versus the long run average of 69 per cent.
So, if sectors are the way to go, the next question is which ones to pick? Firstly, that means identifying those that will thrive and those that will struggle at this particular point in the economic cycle. For us that means a continued, albeit modest, bias towards cyclicals - industry sectors that do especially well when the economy is expanding. Consequently, we favour materials, energy and construction, which are likely to be among the winners as the global economy expands.
Click here to learn more about Pictet's multi-asset approach and why choosing the right sectors is key to maximising investment returns