In recent weeks, market commentators are either making the case that equities will break through the highs from 2022 as rate hikes appear to have peaked or they believe markets will enter a corrective phase because valuations appear frothy.
You could choose to believe either view or do nothing. However, your current equity portfolio is already telling you which view it is positioned for, regardless of what you think. So, let’s consider what typically constitutes a bullish or defensive portfolio, to determine which view your allocation to equities currently supports. Then you can decide whether that reflects your own view and your own appetite to risk before you decide on any realignment.
If your portfolio is heavily weighted in sectors such as Technology (e.g. NVidia) and Consumer discretionary (e.g. Tesla) or you are overweight growth stocks (e.g. Shopify), then your portfolio is positioned to advantage of bullish scenarios.
From 2014 to 2019, the Consumer Discretionary and Technology sectors outperformed the S&P 500 by a factor of 1.25x-2x.
Growth stocks are ones where their historical revenue growth has been increasing at a faster rate than their peer group and they are expected to continue to grow for a long period of time. As such, they may appear expensive based on current profitability ratios, but they attract interest for what they may bring in the future.
Note, that whilst growth stocks like Shopify do well on the upside, be prepared to weather the fall when markets turn:
If your portfolio is heavily weighted in sectors such as Utilities (e.g. Con Edison) or Consumer Staples (e.g. Kellogg) or you are overweight value stocks (e.g. Berkshire Hathaway), then your portfolio is positioned to be more defensive against markets falls.
In 2022 when the S&P 500 fell almost 20%, the Utilities and Consumer Staples sectors only fell a fraction.
Value stocks, such as Berkshire Hathaway, are ones which appear cheap to their sector averages on fundamental ratios such as price to book, price to sales and price to cash flow. For example, during the 2022 stock market fall of ~20%, Berkshire Hathaway was positive instead.
In simple terms, you don’t want your portfolio to react to market moves that you aren’t comfortable with from a risk appetite point of view. Everyone loves greater than 1x participation on the upside but often forgets that this can occur on the downside as well depending on how your portfolio was positioned.
You can use a Scenario Manager to help you assess your portfolio’s sensitivity to market moves and isolate which sectors drag the most. That way, you can decide whether that’s a risk you are comfortable to take, even if you don’t have a directional view of the market.
This uncertainty is why as a whole, portfolios should be diversified across asset classes. However, irrespective of which argument for a bull or bear case wins you over, your actual appetite for risk and your future financial goals should determine how you allocate.
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