* Holding on to domestics while avoiding EM cyclicals
Last month’s sector performances were biased against any form of EM exposure. However,
along with defensives, domestic-exposed cyclicals (Construction and Financials)
outperformed. We see ‘bullish signals’ for these sectors – all five of the Sector Signal longs
are unchanged from last month. ‘Bullish’ sectors returned +3.3% on average, while ‘bearish’
sectors returned +2.8%. Broadly speaking, we are more bullish on European exposure and
have ‘bearish signals’ on EM-exposed/defensive sectors.
* Selectively contrarian for commodity-plays
Based on our Fund Manager Survey, the most contrarian of contrarians would be buying into
the collapsing commodity cycle. However, we are still negative on Basic Resources, despite
our tactical preference for the least-crowded sectors. Earnings revision trends imply further
downside for the sector - unlike Oil & Gas, where revisions are supportive. Less
‘controversial’ contrarian ideas include long Construction and long Banks.
* Avoid all defensive sectors
Macro recovery in Europe implies relative underperformance of Food & Bev and Healthcare,
despite strong momentum on oil price weakness. In addition, earnings revisions for these
sectors are poor, while sentiment remains stretched – especially for Healthcare. We believe
our top strategic recommendation of Financials over Staples remains tactically attractive.
* What is Sector Signals?
'Sector Signals’ combines three of our flagship products, along with price momentum, to
provide ‘Bullish’ and ‘Bearish’ signals to time entry points in European sectors. Components
that form the framework are: 1) Macro: ‘Style Cycle’ determines the beta exposure 2)
Earnings: EPS Revision Ratio (ERR) 3) Positioning: Using inputs from our Fund Manager
Survey (FMS) to avoid crowded positions and find opportunities in uncrowded places and 4)
Price Momentum.