Who will lead the equity market’s next F1 lap?
Take a blended approach – broad equity exposure but also zero in on some sectors to ride their outperformance
AS THE Formula 1 season kicked off this year, there was an incredible amount of uncertainty as to who would emerge at the top of the leader board.
There were sweeping rule changes – the first major overhaul since 2022 – including reductions in the size of cars and tyres; a shift to 100 per cent advanced sustainable fuels; an increase in both the absolute amount and proportion of battery power available; and a change in the cars’ aerodynamic properties to make following the car in front easier at closer distances.
This not only made it more difficult to determine who would win, but also increased on-track overtaking as drivers deployed their electric power boost in different parts of the track. Some F1 purists disagree, but the dramatic increase in overtaking, for me at least, has made the sport exciting in new and different ways.
These new regulations have brought greater competition to the season, creating more opportunities for changes in momentum as the year progresses.
Equity markets mirror racetrack volatility
Just as leadership on the track has shifted, equity markets have had a similar ebb and flow in sector dominance this year. At the time of writing, eight out of 11 US equity sectors have delivered positive returns since the start of the year.
The performance gap is stark. The energy sector is leading the pack (up almost 40 per cent year to date), and the utilities sector is bringing up the rear (down 7 per cent).
The timing of the moves has also varied markedly across sectors. Energy outperformed dramatically in Q1, aided, of course, by the surge in oil prices linked to the Middle East conflict. The materials sector almost kept pace until the conflict broke out at the end of February.
As the energy sector peaked towards the end of Q1, the technology and communication services sectors troughed. The latter two sectors then started to rally for two months, rising more than 40 and over 20 per cent, respectively, during that period.
Since then, the technology sector has traded range-bound and communication services has lost ground, allowing the healthcare sector to take the lead. Meanwhile, the energy sector has also experienced a renaissance since July.
Passive, active or blended
In F1, the new regulations have made the season more unpredictable, and fans may react differently depending on how the teams and drivers they support are performing. In sport, who we support often shapes how closely we follow the action.
Investing in equity markets requires no such loyalty. So, how do we approach the rest of the year?
You are faced with three options:
First, you can ignore the vagaries of the individual sectors, invest in the overall stock market and accept that many of these differences will even out over time.
The benefit of this approach is that it is low-maintenance and less volatile, sparing you from worrying about which artificial intelligence model will perform best or what will happen to oil prices.
The second approach is to try to predict the sectors that will outperform in the coming weeks and position your equity portfolio accordingly.
The downsides are twofold:
- This is time-intensive, as you need to keep on top of the news flow and decipher what will happen, what the markets will price in; and
- It is incredibly difficult to execute. Many investors often get whipsawed by short-term market movements rather than look beyond the noise.
We prefer to take a blended approach. We have a “foundation” allocation that provides broad exposure to all equity sectors and geographies, complemented by targeted positions in select sectors or industries on the periphery.
This delivers both the diversification benefits of a broad equity exposure and the opportunity to benefit from sector outperformance where appropriate.
As we enter the final lap of 2026 in Q4, here is how we are positioned. In equities, we are overweight the financial sector in the US, Europe and Japan; technology and communication services in the US and China; and industrials in Europe.
However, our diversified Foundation allocation still accounts for around 90 to 95 per cent of our portfolio – ensuring we capture speed on the corners without ever losing control of the car.
The writer is global chief investment officer at Standard Chartered Bank’s wealth solutions unit
