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In a scenario where economic growth remains strong and recession risks are low despite rising Interest rates, adjusting your investment portfolio to achieve better performance requires a re-evaluation of sector allocations.

According to BCA Research, recent changes in U.S. economic data indicate a reduced likelihood of a recession and a healthier economy than previously forecasted. This shift calls for a move from defensive sectors like Utilities and Telecoms, which usually offer protection during economic downturns, to more growth-oriented sectors that perform well during periods of sustained economic momentum.

BCA Research suggests increasing investments in sectors that thrive in a robust economy, such as Energy and Technology, while decreasing exposure to sectors typically preferred during economic slowdowns. The focus is on positioning for a scenario where economic growth continues without a recession, potentially leading to overheating due to loose monetary policies.

Defensive sectors like Utilities and Telecoms have been favored in recent quarters in anticipation of a slowdown or recession. However, with stronger-than-expected economic data, the appeal of these sectors has diminished. BCA recommends taking profits in these areas and shifting towards sectors with greater growth potential.

Energy has been upgraded to a tactical overweight position by BCA Research, considering geopolitical tensions in the Middle East and expectations of increased demand driven by sustained economic activity. Meanwhile, Technology, which faced challenges earlier in the year due to high valuations, is now seen as undervalued relative to other cyclical sectors. Opportunities within the Software and Hardware segments, which appear oversold, are highlighted for potential growth.

Consumer Discretionary and Industrials, tied to consumer spending and business investment, are positioned to excel in a landscape of continued economic growth. Retail and travel sectors, influenced by consumer strength and service demand, are singled out as areas of opportunity.

The backdrop of strong economic data, coupled with easing measures and a stable labor market, indicates potential for higher Inflation and upward pressure on bond yields. Sectors correlated with rising economic activity and commodity prices are favored in this environment.

However, BCA warns that a scenario of sustained growth may evolve into an overheated economy, necessitating a swift change in monetary policy. This could introduce volatility into growth sectors, prompting a tactical, rather than long-term, approach to investments, particularly in Energy. It is advised to stay agile in adjusting positions based on new data as it emerges.

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