Our U.S equity team continues to recommend a long financials/short consumer staples equity pair trade.
There are high odds of further gains in coming months as business confidence picks up, and hiring and capital spending gain traction leading to a narrowing output gap.
Importantly, the relative share price ratio has been positively correlated with the output and unemployment gaps. Financials profits benefit from reviving animal spirits, rising loan activity and increased capital formation. In contrast, consumer staples demand underwhelms at the margin as the economic recovery gains enough thrust to become self-sustaining. This message is corroborated by our relative sale-per-share models that are pointing to a brighter demand backdrop for the financials sector compared with consumer staples businesses.
In the absence of a relapse into a deflationary environment, financials will maintain the upper hand over consumer staples.
Source: BCA Research
