Time to add cyclical exposure
- upgrading Industrials to OW
We upgrade cyclicals to OW. Weaker growth now
seems increasingly priced into cyclicals. Relative
PEs are at their lowest levels since Nov-08, and
earnings revisions appear to have troughed. We
upgrade Industrials to OW, and downgrade Health
Care to UW.
Weaker growth increasingly priced in…
Cyclicals are just 4% off their 2011 lows relative to
defensives. While we may have to wait a little longer for
evidence, we believe the growth outlook isn’t as bad as
feared. Financial conditions have eased considerably
and economic surprise indices are not breaking down.
While it is hard to see an imminent pick-up in growth, a
broader slowdown is not our base case.
… and EPS momentum has improved…
Earnings downgrades have weighed heavily on
cyclicals. However, in recent weeks, especially since the
EUR has been weakening, cyclicals’ earnings revisions
have improved significantly.
… and valuations appear increasingly attractive
On 12M forward PEs, cyclicals trade at their lowest
relative valuations since Nov-08. Other valuation metrics
(such as normalised PEs) are less supportive, however,
and so we remain selective in buying cyclicals where
there is greater conviction around earnings.
We upgrade Industrials to OW, downgrade Health
Care to UW
Many industrials look oversold, with attractive valuations
and some areas showing an improvement in EPS
momentum. In contrast, Health Care performance looks
very extended, with increasingly stretched valuations.
We buy Babcock, Philips and BMW in our portfolio and
we sell Reed and GN Store Nord.