* We remain pro-cyclical but see Pharma in a unique position within defensives
Our sector positioning is pro-cyclical and remains so as we believe the current sector rotation has further
to run given the reversal has been very concentrated on commodity sectors. However, we also believe
the Pharma sector has not behaved as a defensive in the current market and deserves to be analysed in a
very different light to other classic defensives such as Staples. Pharma is the only defensive with negative
12m price momentum relative to the European market and if anything its valuation is now closer to that
of cyclical sectors than of other defensives.
* Upgrade Pharma to Overweight, from Underweight
In contrast to other defensives, the performance of Pharma is now no longer ahead of PMI trends. In
fact, the current performance has now crossed marginally below PMIs for the first time in c 3 years. The
sector now trades close to the market PE (104% market rel PE) and in past cycles it has troughed close to
but above the market level (the one exception is the 2009/10 bounce back). In addition, valuations
relative to peers are extreme, div yields rel to Food Prod for example are close to historical highs.
* Downgrade Media from Overweight to Neutral
After being Overweight the sector for some time we neutralise our position in line with our analysts'
views of being selective in the sector (buying Southern European names and selling Northern European
names). The gap between industrial confidence and Media earnings that was one of the catalysts for our
overweight is no longer visible (see Fig 14) and earnings momentum no longer appears to provide
support for the sector continued outperformance (see Fig 17).
* What to buy?
The relative plays of buying Pharma vs Staples sectors such as Food Producers, Beverages or Household
Prods seem attractive to us. Key Buys within Pharma highlighted by our analysts are Roche, AstraZeneca
and Shire. In Media, where we now recommend being selective, key Buys are Mediaset and Mediaset
Espana while key Sells are ITV and ProSieben. NB - Please also see back of the report for sector
chartbook.