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The coming economic growth could be much broader and stronger than any of the previous cycles. (Image: REUTERS)
Some Wall Street investors have reverted to defensive trading after a strong rebound in stock indexes saw them hit record highs. Investors have focused on the defensive, choosing large caps over mid and small caps, and opted for growth over value stocks. However, this shift to defense may be premature, according to Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. “We disagree and believe that a defensive shift for investment portfolios is premature. In our view, recent events represent a pause – not a reversal – in reflation trading, ”she added.
The shift to defensive sectors indicates that earnings expectations are already costing most of the good post-pandemic news, ranging from an economic rebound to reopening. The coming economic growth, however, could be much broader and stronger than any other cycle seen previously. “Tax expenditures, which focus on infrastructure, would be intrinsically linked to greater ‘capital deepening’, in which capital per worker increases in the economy,” Lisa Shalett wrote in a blog.
In addition, inflation is expected to be accompanied by improving demographics and faster credit growth. “This last element is expected to come after huge pent-up demand and depleted surplus economies,” she said. Meanwhile, economic indicators continued to show better numbers, with March retail sales in the United States up 9.8% from February.
Lisa Shalett believes it’s time for investors to rebalance their portfolios while keeping cyclicals and value stocks at the heart. “Our research suggests that value investing tends to outperform growth investing during above-average economic growth and rising inflation expectations; we expect both conditions to persist in the new business cycle, ”she said. Shalett added that stretched valuations are likely to move investors towards growth at a reasonable pricing strategy.
Investors are advised to monitor growth indicators as well as inflation expectations while continuing to refocus on long-term and rate-sensitive sectors, both bonds and equities, and pro-cyclicals. , short-lived, value and quality.