Saturday, April 27, 2013

Cyclical stocks underperform in April

Emerging markets cyclical stocks have been trailing defensive shares for some time, as investors stay uneasy about global growth.
Barron's: - While the MSCI Emerging Markets Index has a price/earnings ratio of 10.3 times the next 12 months of earnings, the average "cyclical" stock, whose earnings are linked to the strength of the global economy, has seen its valuation fall to 9.6 times. The average "defensive" stock, meanwhile, has a P/E ratio of 15.1 times. The 5.5-point gap between the two is more than twice the average of 2.7 points since 1995, according to UBS data, and it's been at least that high for the last six months.
But now, in another sign of the "spring slowdown" (discussed here), US cyclical shares - which have been beating the market through most of 2013 - have underperformed in April.

Source: Ycharts (click to enlarge)

Similarly to emerging markets, US defensive share valuations have been quite lofty on a relative (and one could argue absolute) basis. Now this gap is widening further.

Source: WSJ

This is one of the reasons economists are so focused on China. The nation's growth and its impact on global demand for natural resources will be the key determinant of a number of cyclical shares' relative performance going forward. So far investors haven't been impressed.

Update: CS published an excellent chart showing how the latest upturn in the market was led by defensive shares.
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