Excluding our oil & gas names, European mechanicals are up 23% so far in 2015 (12% in USD), led by the Europe-centric short-cycle names. Only the Auto sector has performed better. With sustained upward momentum in the European leading indicators, it is unsurprising that we have seen a pro-cyclical rotation, but as we look ahead to the Q1 earnings season we ask: Can the sector live up to the heightened expectations? We think our O&G exposed names continue to look most vulnerable, but note that SKF – the sector’s purest play on European IP recovery –
has now become the most shorted name in the sector. Among the mechanicals, Atlas Copco and GEA remain our preferred names, Alfa Laval and Metso least preferred. For our European Capital Goods sector Schneider remains our Top Pick.