Related: Are Equities Overvalued?

When looking at how the S&P 500 Index is impacted by currency exposure a few sectors stand out; Industrials and Health Care (Drug Companies) for example, have high foreign exposure whereas Utilities and Real Estate do not.

On a side note, the Energy sector may be the sector that has the highest negative correlation with the USD, but that effect may be through the price of oil rather than through the USD directly; the price of oil tends to fall when the USD is strong and vice versa.

Interest rates are another factor that can have a significant impact on relative sector performance. For example, Utilities are frequently bought as a bond alternative, where the focus is on the dividend yield. Higher interest rates will impact the Utilities sector negatively the same way that bonds decline in value when rates go up.

Where to start

As a general rule, the starting point for incorporating macroeconomic views should be a view of how the Global economy may look over the next few quarters. As always, when you link sector performance to the economic outlook you run the risk of “being late to the party” – the market may have already priced in the scenario you see unfolding.

Related: Is It the Right Time to Look at Energy ETFs?

A better approach to using macroeconomic views to inform your investment strategy, and one we use at Hillswick, is to build an independent economic outlook and then contrast it with what the market is already expecting. By studying imbedded pricing we can determine the risk premium between “our” outlook and the implied market forecast and aim to determine what is already “priced in” to the market. If the premium is large enough, we will then position ourselves to take advantage. This approach avoids getting trapped in consensus positions with little upside potential.

Jan Erik Wärneryd is a Senior Portfolio Manager at Hillswick Asset Management, a participant in the ETF Strategist Channel