All 6 macro signals down: Hide in Quality, Yield and Big cap
* Synchronised fall in macro: Style Cycle stays in ‘Recession’
All six indicators in our European Composite Macro Indicator (CMI) fell this month - the last two times this happened, stocks were already down by over 20% (Aug ‘11, Jan ‘09). Style Cycle stays in the ‘Recession’ phase for the third month, suggesting
European stocks will remain under pressure. Momentum continues to favour high Quality over high Risk, Large cap over Small cap and dividend yielding Defensives over Financials / Cyclicals.
* Too early to look for ‘Recovery’
Such a synchronised fall in macro indictors is not uncommon, but questions are opening up as to whether a) we are getting closer towards a floor in the economic cycle, b) ‘Recovery’ is a given next year and c) momentum in high ‘Quality’ stocks is
at its peak. For us, it is a resounding ‘No’. ‘Recession’ phases can last for a year and our ‘Recession’ stocks (high Quality, low Risk) are, at best, only mid-way through outperforming ‘Recovery’ stocks (low Quality, high Risk)
* Favour UK, Swiss, H/care, Staples over Financials – pg 13
Centrica, Glaxo, BA Tobacco, Imperial Tobacco, AstraZeneca, Diageo, Roche, Nestle, Reckitt Benckiser and SSE are the top-10 attractive ‘Recession’ stocks.
* Global EPS Revisions and PPI join the gloom
Bond yields, OECD lead indicator and IFO German business confidence have been falling since the start of the year and last month GDP expectations started to tumble. A drop in Global EPS revisions and Producer Price Inflation (proxy of pricing-power) this month has led all the six indicators in the CMI to fall.