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If BofA Securities U.S. quantitative strategist Savita Subramanian is right, investors will have to re-learn a lot of what they know about individual market sectors because now “risky sectors are safe, safe sectors are risky.”
The general theme of the strategist’s most recent report is that market focus is set to change from macroeconomic factors like interest rates, lockdown-related slowdowns, and government spending to more stock-specific criteria. The transition will be complicated by the fact that we are entering what will be “not your parents’ economic slowdown,” according to Ms. Subramanian.
The changing risk profile of market sectors is one way that the ongoing economic slowdown is different from the past. Specifically, U.S. energy and other commodity stocks are screening as low risk in terms of volatility relative to the overall market - beta, in other words - after showing as high risk over the past decade. The same is true of U.S. industrials and financials.
The reverse case – a move from medium and low-risk into the high risk category - is apparent for information technology, consumer discretionary and communications services stocks. Extrapolating these U.S.-based results to Canadian markets is not entirely straightforward. The financials sector, for instance, is not comparable because of the economic dominance of the major Canadian banks. Similarly, the domestic consumer discretionary sector does not have volatile behemoths like Tesla andThe improving risk profile of energy and commodity stocks should remain a cross-border trend as long as these companies maintain capital discipline and return funds to shareholders.
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