LONDON: Investors who missed a cyclical stocks rally should stop trying to catch up and instead pick off big companies with low debt which have underperformed the market given the cloudy economic outlook. Cyclical stocks, such as banks, miners and automakers, have moved from being bargain basement picks to top sellers during a two-month rally which has seen the pan-European FTSEurofirst 300 rebound 32 per cent between March 9-May 8.
That has seen some sectoral valuations, as measured by one-year forward price-to-earnings (P/E) ratios -- a measure of stock valuations -- rise beyond their longer-term average. Also, even if the pace of economic deterioration had moderated, global growth remained murky -- suggesting that anyone chasing the rally might be better off picking stocks rather than sectors. "We may now be past the time for indiscriminate buying of cyclical stocks and selling of defensives," said Nick Nelson, UBS's European equity strategist. European banks, which have rallied 94 per cent since early March, carry a one-year forward price-to-earnings of 11.9, compared with a five-year average of 12, according to Thomson Reuters data. Miners, another cyclical sector which has outpaced the broader market, are trading at 15.9 times forwards P/E, versus a five-year average of 10.44. By contrast, European healthcare, one of the worst performing sectors in the DJ STOXX 600, has a forward P/E of 10. That compares with a five-year average of 17.2. "Investors should look to differentiate and prefer stocks (cyclical or defensive) that are quality, large caps with less debt than sector peers and that have lagged the sector, such as British American Tobacco, CRH and WPP," Nelson said. BAT, the world's No. 2 cigarette group, for instance, has gained a mere 4.2 per cent since March 9, underperforming the overall market, which has been buoyed by improving leading indicators such as PMI surveys and better China data. U, V OR W? The incentive to dig deeper within sectors to look for value will be reinforced given policymakers such as European Central Bank chief Jean-Claude Trichet or Bank of England Governor Mervyn King are saying they expect economic recovery to materialise slowly. Recent economic reports have added to the debate over the shape of the rebound -- V, U or W. For example, US retail sales fell the second straight month in April while Chinese exports fell more sharply than expected last month. Analysts at Credit Suisse have turned to more defensive stocks as they expect a W-shaped economic recovery, in which the economy dips a second time after recovering from an earlier decline. "We are seeing an inventory rebound, but growth will not return to trend for another couple of years, as we estimate there is still $7 trillion of excess leverage in the Group of Four (countries) and U.S. household liabilities relative to assets have never been this extreme," they said. "Additionally, in most of the world housing still looks expensive and lending conditions are still too tight," they said, upgrading food producers to "overweight" from benchmark. According to media polls, the world's richest nations will put recession behind them later this year, but when growth returns it will be sluggish. Among the cheap defensives that Credit Suisse likes were BAT, Imperial Tobacco, GlaxoSmithKline, Sanofi-Aventis, Pfizer, SABMiller, Telefonica and Vodafone. BMW, Carnival, DSM, Nokia and Q-Cells were among the cheap cyclicals. MORE DEFENSIVE FOR NOW Philip Lawlor, chief portfolio strategist at Nomura, said defensive stocks should be investors' "natural home" until the cloud of economic uncertainty has cleared somewhat. "Trend nominal GDP growth is going to be a lot lower in this cycle ... You can't be that keen on cyclicals if you think nominal growth for the world economy is going to be a lot lower than it has been," Lawlor said. He said the market was getting to the stage where any weak economic indicators that showed it was not a V-shaped recovery -- a sharp bounce -- would send investors running for defensive stocks, again. For those who have missed the rally in cyclicals, it may be better to wait it out until they see clearer signals of economic recovery and price-to-earnings ratios return closer to, or fall below, longer-term averages. "I would be very wary of being sucked into that because there is no real evidence of an imminent or definitive revival in the global economy," said Tim Whitehead, head of portfolio services at Leeds-based private client stockbroker Redmayne-Bentley, adding that he was looking to add a bit more defensive element into the portfolio. http://economictimes.indiatimes.com/Missed-rally-Buy-low-debt-underperformers/articleshow/4530464.cms --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en -~----------~----~----~----~------~----~------~--~---
