Sector behavior and inflation regimes - A regime switch is happening

2022 was the year that investors had to tilt sector exposures to take advantage of higher inflation, but 2023 seems to be setting up for something different. With inflation falling, the switch must be toward those sectors that will do well during an inflation slowdown. Macro factor tilts can be just as important as factor tilts for asset allocation. 

The important sector tilts should be based on macro environment; what is growth and what is inflation. The important part is that these must be looked at in tandem. Are we in a slow growth with high inflation or slow growth with falling inflation there is a big difference. Regime identification can help with this process. Declining inflation with slow growth, not a recession, looks to be the environment for 2023 not rising inflation and a recession. The latest unemployment number will create further doubt that a recession is imminent. The inflation reversals suggests that the worst of the inflation shock is behind us.

The following is from some UBS research.