Reuters logo
Fed-inspired gyrations hold silver lining for European cyclicals
June 25, 2013 / 11:47 AM / 4 years ago

Fed-inspired gyrations hold silver lining for European cyclicals

LONDON (Reuters) - Investors are increasingly opting for economically sensitive European stocks as the prospect of reduced central bank stimulus brings the global growth outlook into focus.

Until just six weeks ago, this year’s European stocks rally had been led by so-called defensive shares - stocks offering a bond-like steady income - reflecting investor caution over growth and lower expected profits for firms linked to the economic cycle.

But with the U.S. Federal Reserve signaling last week it would scale back stimulus in response to a more robust U.S. economy, analysts say cyclical stocks are well-placed to benefit.

“(Cyclicals) are undervalued particularly compared to the defensives,” said Ros Price, chief investment strategist at Seven Investment Management, which has 4 billion pounds ($6.2 billion) of assets under management.

“Provided the Fed doesn’t derail the recovery by being over-enthusiastic about withdrawal then I think (the Fed’s announcement) was quite good (for cyclicals),” she said.

Analysts have for months been forecasting a “great rotation” out of low-risk, low-return bonds into equities, though evidence of this happening has until recently been scant.

Stocks and bonds have both taken a hammering since the Fed announced its “tapering” timetable. The fall in bond prices, and consequent rise in yields should make bonds less attractive.

For those already invested in equities, the same factors should increase the appeal of economically sensitive stocks rather than those with bond-like characteristics.

Bond proxies might include healthcare firms, which generate reliable dividends as demand for their services tends to be stable.

“The equity investment approach will be the same as it always is - where’s the greatest potential value and where’s the greatest potential upside?” Ian Richards, head of equity strategy at Exane BNP Paribas, said.

The curve of the German share price index DAX board is pictured at the Frankfurt stock exchange June 25, 2013. REUTERS/Remote/Stringer

A weak performance in recent months has left cyclical stocks looking cheap. Autos trade at 7.6 times their 12-month forward price/earnings ratio compared with defensive consumer staples on 16.1 times, according to Thomson Reuters StarMine data.

J O Hambro Investment Management has recently further cut its exposure to bonds while raising its exposure to cyclical equities, encouraged by economic recovery, Algernon Percy, head of private clients, said.

In his JOHIM Portfolio Fund, Percy has raised exposure to the firm’s Waverton European fund, which owns shares in firms such as carmaker Renault (RENA.PA), British Airways owner International Consolidated Airlines (ICAG.L) and bank BNP Paribas (BNPP.PA).

Europe-focused exchange-traded funds covering cyclical sectors saw net inflows of $222.2 million between May 1 and June 14, after monthly outflows since February, Markit data showed.

Defensive sectors saw net outflows of $199 million over the period, having seen monthly inflows since February.

Autos .SXAP are the top performers this quarter with a 0.3 percent rise against a fall of 6.2 percent in the Euro STOXX 600 index over the period, while food & beverages .SX3P are among the biggest laggards, off more than 12 percent.

TOO DIRE

“What happens is that (investors realize) they’re pricing in a world that is too dire... and that’s when you’ll see that the valuations of (cyclical) stocks become very compelling,” said Shaniel Ramjee, an investment manager at Baring Asset Management - which has 39.5 billion pounds of assets under management.

Cyclical stocks have long risen in line with higher bond yields, suggesting they have the potential for further gains. link.reuters.com/fyq78t

“For me the logical approach is... to get away from bond proxies, to go for the things that are least like bonds. Usually what performs well in this sort of environment are things like cyclicals,” said Paul Jackson, strategist at Societe Generale.

($1 = 0.6495 British pounds)

Graphic by Tricia Wright, editing by Nigel Stephenson

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below