The Brexit vote caught the market off-guard and though recovered nicely, Brexit left more questions than answers with resolution far in the distance.
Business in Britain will not come to a complete stop and the exposure of most US firms appears to be limited.
It’s too early to make sector changes so investors should stay diversified. Any realignment depends on the political decisions of UK and EU policymakers which are impossible to predict.
Sector Summary
| S&P Wgt% | Name | Tilt | Comment |
|---|---|---|---|
| 6.60 | Energy | Market | Declining U.S. oil production over the next several quarters will help reduce global oversupply, but wont fix the imbalance before 2017. Reduced investment translates to output declines and helps markets rebalance. Energy sector valuations are high. |
| 2.80 | Materials | Market | Optimism continues to reign in Materials year to date, but investors are overestimating the sustainability of recent commodity price rallies, leaving the sector severely overvalued. The reasons for rallies differ, but won't stick. |
| 10.10 | Industrials | Market | Industrials outperformed the broader market since early February but remains undervalued. U.S. manufacturing data has turned slightly positive in recent months, while manufacturing across the rest of the world has been challenged. |
| 12.90 | Consumer Discretionary | Market | The market seems to be underestimating longer-term revenue growth and margin expansion opportunities in this volatile group as measured by relative PEs, especially with its healthy high-end consumer sentiment. |
| 10.70 | Consumer Staples | Market | Consumer Staples valuations have continued to trend higher over the past several months, leaving the sector slightly overvalued. In light of slowing growth prospects around the world, sluggish revenue growth are expected. |
| 14.70 | Health Care | Market | Market valuations in healthcare have improved over the last quarter. Strong drug launches and excellent rapidly progressing clinical data in specialty-care areas are supporting increased productivity at drug and biotech companies. |
| 15.60 | Financials | Over | Brexit effects on interest rates, currency exchange rates, asset price levels, and capital market volatility will likely be more material to earnings than problems caused by relocating operations out of the UK to EU countries. |
| 20.40 | Information Technology | Over | Overall, we view the tech sector as fairly valued though we continue to see opportunities in smartphone related vendors. Microsofts evolution will yield long-term success. When the chips are down, bet on capital equipment firms. |
| 2.80 | Telecom Services | Under | Brexit fears have pushed down most European Telecom stocks which is an overreaction. Telecom is somewhat immune to geopolitical changes and Brexit will have little effect on cross-border transfers of voice or data. |
| 3.40 | Utilities | Under | Utilities have kept its foot on the gas during the second quarter. The spread between U.S. utilities 3.6% average dividend yield and 1.6% 10-year U.S. Treasuries suggests utilities have a long way to run. |
