Despite some disappointment in recent economic data, the main macro drivers are consistent with a recovery in cyclical vs. defensive stocks.
Global purchasing manager surveys in both the manufacturing and services sectors continue to herald a cyclical recovery. Asian manufacturing inventories are contracting, and new orders are rising, pointing to an upturn in output growth, a boon for goods-producing economic-sensitive businesses.
Meanwhile, hours worked in the U.S. transportation sector are soaring, reinforcing that global trade is on the mend.
Importantly, global policy is ultra reflationary, and our global leading economic indicator is rising. This stands in contrast with the summer equity market swoons over the past few years, which were marked by worries of a euro area blow up, U.S. debt ceiling debacle and Chinese policy tightening.
These factors imply that macro forces are consistent with cyclical sector earnings outperformance in the coming quarters. Profit outperformance may not even be a necessary condition for a rebound in the relative share price ratio. The ratio is already priced for a global recession. The slow improvement in global economic sentiment points to a re-rating in the coming quarters.
In sum, profit, valuation and macro considerations argue for a rebound in the cyclical to defensive share price ratio, which would imply that a leadership transition will occur. Potential catalysts for such a development would be an end to the appreciation in the U.S. dollar and/or a backup in global bond yields on the back of increased global economic activity. As a result, our U.S. Equity Strategy service is sticking with a largely cyclical vs. defensive portfolio bias.
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Source: BCA Research
