Cyclicals: more to go for
In spite of recent cyclical outperformance, we continue to overweight cyclicals
(see Only a mild slowdown: become more cyclical, 17 May 2013) as:
■ The ratio of cyclicals to defensives should be c5% higher given the level of
IFO business expectations, and US macro momentum is still rising;
■ The ratio of cyclicals to defensives should be c20% higher given where the
market is; sector risk appetite, at 0.5σ above average, is still more
depressed than overall risk appetite (at 1.3σ above average);
■ Cyclical rallies almost always continue until cyclicals become overbought,
and for that to happen cyclicals have to be 5.5% higher);
■ The P/B of cyclicals relative to defensives is still below average.
Sector performance since mid-April has been led by cyclicals (the only
underperforming cyclicals were software and mining, while the only defensive
sector to outperform has been energy).
What performs best when ISM rises and there is a bear-steepening of the
yield curve? Semis, ad agencies, mining, cap goods, banks and luxury perform
the best. Tobacco, telecoms, drugs and utilities perform the worst. Retailing
comes out as being a slightly defensive sector.
Our preferred cyclicals continue to be: US corporate spend plays (focusing on
software, advertising agencies, high-end hotels), autos, airlines, UK domestic
cyclicals and US housing plays. Some of our preferred names are: ITV,
Kingfisher, Lufthansa, Assa Abloy, WPP and SAP. We are underweight US
utilities, telecoms and tobacco and European tobacco and food producers.
Screens: If bond yields continue to rise, then we want to focus on companies
with cyclicality, low financial leverage and positive earnings revisions, of which
the following are Outperform-rated: Atos, Taylor Wimpey and Ashtead. Equally,
we want to avoid defensive companies with high financial leverage (net debt to
EBITDA above 2x) with negative earnings momentum and which are expensive
on HOLT: United Utilities and Fresenius Medical Care.
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In spite of recent cyclical outperformance, we continue to overweight cyclicals
(see Only a mild slowdown: become more cyclical, 17 May 2013) as:
■ The ratio of cyclicals to defensives should be c5% higher given the level of
IFO business expectations, and US macro momentum is still rising;
■ The ratio of cyclicals to defensives should be c20% higher given where the
market is; sector risk appetite, at 0.5σ above average, is still more
depressed than overall risk appetite (at 1.3σ above average);
■ Cyclical rallies almost always continue until cyclicals become overbought,
and for that to happen cyclicals have to be 5.5% higher);
■ The P/B of cyclicals relative to defensives is still below average.
Sector performance since mid-April has been led by cyclicals (the only
underperforming cyclicals were software and mining, while the only defensive
sector to outperform has been energy).
What performs best when ISM rises and there is a bear-steepening of the
yield curve? Semis, ad agencies, mining, cap goods, banks and luxury perform
the best. Tobacco, telecoms, drugs and utilities perform the worst. Retailing
comes out as being a slightly defensive sector.
Our preferred cyclicals continue to be: US corporate spend plays (focusing on
software, advertising agencies, high-end hotels), autos, airlines, UK domestic
cyclicals and US housing plays. Some of our preferred names are: ITV,
Kingfisher, Lufthansa, Assa Abloy, WPP and SAP. We are underweight US
utilities, telecoms and tobacco and European tobacco and food producers.
Screens: If bond yields continue to rise, then we want to focus on companies
with cyclicality, low financial leverage and positive earnings revisions, of which
the following are Outperform-rated: Atos, Taylor Wimpey and Ashtead. Equally,
we want to avoid defensive companies with high financial leverage (net debt to
EBITDA above 2x) with negative earnings momentum and which are expensive
on HOLT: United Utilities and Fresenius Medical Care.
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