Cyclicals vs Defensives

In the near term, favor oil and oil producers outside the Gulf Arab states. Over a 12-month horizon, favor US and North American equities, defensive sectors over cyclicals, and safe-assets. Within cyclicals, stick to energy and defense.

Contrary to conventional wisdom, most leading indicators suggest that the US labor market is weakening, including our very own “Mel rule.” After being overweight stocks last year, we moved to neutral at the start of 2024, and are now putting equities on downgrade watch with the expectation of shifting them to underweight later this year.

Europe credit flows are stabilizing, hence a major drag on the region’s growth will dissipate. What does this development imply for European equities?

The equity rally extended into March as hard landing outcome was priced out. It has broadened, as money flowed into less over-loved pockets of the market. Our models signal that margins are about to stabilize, and earnings growth will accelerate as the year progresses. However, companies are raising prices again and the no-landing outcome and fewer than three rate cuts this year are increasingly likely.

Italy is no longer Europe’s problem child. Investors will be better off reassessing their views of Italian assets, which represent a buying opportunity on a structural time horizon.

In this Strategy Outlook we examine why, contrary to popular perception, the odds of a global recession over the next 12 months are rising not falling.