Equities: Cyclicals vs defensives

08.03.2018

Cyclicals have had a very strong run over the last couple of years outperforming defensives by a huge amount in both Europe and the US. This development have been driven by a positive global macro environment with increasing growth momentum, earnings tailwind for cyclicals and yields continuing to move higher being a larger headwind for defensives.

We note that certain headwinds are starting to appear for cyclicals in terms of a peaking macro momentum and valuations that have re-rated significantly relative to defensives over the past two years. Conversely, it is typical when the economic surprise index moves below zero that cyclicals start to show a clear negative performance – and we are not there yet. Likewise, a continued upward move in yields would normally favour cyclicals but we have already seen a doubling of the 10-year US bond yield since the bottom in the middle of 2016.

Cyclicals vs defensives performance for MSCI World since 2009

If you as an investor would like to increase your exposure against defensives the strategy Equities Low Volatility is an obviously choice. The strategy has an exposure against defensives – Consumer Staples, Health Care, Telecommunication Services, Utilities and Real Estate – of around 50 percent which is significantly higher than the global equity market (27 percent). At the same time with an investment in Equities Low Volatility you get the advantage of having an expected lower drawdown compared to the global equity market in periods of distress – a nice insurance with the latest increase in market volatility in mind.