Wherever You Think The Economy Goes Next, There’s A Sector For That

Wherever You Think The Economy Goes Next, There’s A Sector For That
Stéphane Renevier, CFA

almost 2 years ago1 min

The thing about stocks is that they tend to perform best when inflation is weak and economic growth is strong. But not all industries rely on that mix, meaning you can find sectors and stocks that are likely to outperform no matter what your expectations for the economy.

Sure, growth sectors like retail, media and entertainment, and tech (particularly hardware, software, and semiconductors) outperform the broader market when growth is high and inflation is low. But you’re probably not expecting that environment any time soon.

Chances are you see the economy remaining in a “stagflationary” environment, where inflation is high and economic growth is low. And if so, you can expect food, beverage and tobacco, and household products to outperform. Energy and utilities are also good bets, though the former is a better hedge when inflation is higher and the latter when growth is lower.

If, on the other hand, you see the economy headed for “reflation” – i.e. higher growth and higher inflation – you might want to look at the banking and materials sectors. Expecting lower growth, but inflation to come down? Pharma, telco, consumer staples, and commercial services perform well in that challenging scenario. Whatever your view, you can invest in the appropriate industries by buying into the ETFs that track them (find a list here) – or simply use it as a filtering tool to generate stock ideas.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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