John Porter, Boston-based chief investment officer of equities at institutional manager Newton Investment Management Group, said institutional investors are concerned about inflation, rising interest rates and a potential recession this year, but the energy and health care sectors might provide some shelter.
"Although inflation appears to have peaked, it still remains far above the Federal Reserve's 2% target and this situation creates a lot of uncertainty for institutional investors," he said.
Mr. Porter thinks there is now an "above average" chance for a U.S. recession this year or early next year — although he notes that some recent economic data, including a strong jobs market and robust consumer spending, might mitigate the length and severity of any potential recession.
The gradual re-opening of China's vast economy, he added, should also reduce the magnitude of any potential global recession.
Still, the multitude of unknowns should prompt institutional investors to "stay flexible" with respect to their asset allocations and move in and out of positions as conditions warrant, he said.
Mr. Porter noted that he is a bottom-up stock picker, which means he can find attractive companies in any sector based on their individual characteristics. Still, there are some sectors he is currently very bullish on, including health care and energy.
Within health care, he particularly favors biotech and life sciences, industries that are producing "amazingly transformational products" and have strong pipelines for at least the next few years. "Advances in gene therapy will unveil particularly exciting new products for biotech companies," he added. "In general, health care stocks provide stable business models and great product innovations."
A somewhat contrarian sector pick for Mr. Porter is the oil and gas sector. "The energy sector did extraordinary well in 2022 and their valuations still remain highly attractive," he said. "In addition, oil companies are practicing capital discipline and offer very strong cash flows and dividend yields."
Moreover, the rebound of China's economy, the world's biggest energy consumer, will help support earnings growth at oil and gas firms.
Mr. Porter noted, however, that energy only accounts for about 4.9% of the weighting in the S&P 500 index. "This means that outperformance by the energy sector did not really push up performance of portfolios that had such small exposure to energy last year," he said.
In addition, Mr. Porter suspects that growing ESG concerns and an increasing disdain for fossil fuel might have kept some institutional investors from allocating to energy stocks.
Newton, a subsidiary of BNY Mellon Investment Management, has about $105 billion in assets under management.
