Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy

In contrast to Q1, when key bond proxy Defensive sectors – Utilities, Real Estate and Staples – were the three worst performers, Q2 has brought a change. QTD, these three sectors are in line in Europe, making a positive swing in performance of 10%. The worst performers so far this quarter are Autos, Travel & Leisure, Chemicals, Luxury and Construction Materials – all Cyclicals. Will this shift last? We believe it will, on further repricing of a range of tail risks, and reiterate our barbell of OW Defensives and Commodities. First, many Cyclical sectors, with some notable exceptions such as Chemicals, Commodities and Logistics, strongly outperformed Defensives last year, when PMIs were falling, so why should they now outperform again? Also, the valuations of Cyclicals, which were cheap at end 2022, have moved to the expensive side of fair value. Second, activity momentum is picking up in manufacturing and in Europe/China, the laggards from last year, but crucially US growth momentum is likely slowing into year-end. As US CESI has turned negative, Defensives could have the upper hand. Finally, bond yields are likely to be flat or move lower into year-end; we reiterate our call from last October that US 10-year yield has likely peaked at 5%. Now, in terms of styles, this should keep helping our OW on Growth vs Value, but should also support bond proxies. Looking at Defensive sectors, Healthcare as an index was up this year in Q1, and in Q2 it worked even ex NOVOB. We think this broadening should continue. Utilities see a pickup in CO2 and in gas prices, in addition to supportive EPS momentum. Staples do not have many fans, but are markedly cheaper currently than in 2022. On the negative side, we remain cautious on Consumer Discretionary – in particular on Autos and on Luxury; we are still UW Chemicals, even as we acknowledge that they already had a terrible 2023, and are again strongly behind ytd, by 1000bp in Europe; and we think that Banks are likely to keep rolling over.

This podcast was recorded on 17 June 2024.

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