London
REMEMBER food and beverage stocks? The erstwhile market darlings are having a tough time this month as investors are quickly losing appetite for defensive and growth sectors and are piling into cyclical and value stocks instead.
It may be too early to say whether it's some unwinding of very crowded trades or the start of a longer-term rotation, but one thing is for sure: macro sentiment and bond yields will dictate whether this trend has legs.
The switch is well reflected in the relative rotation chart for European sectors, with huge improvements for banks, insurance, basic resources, autos and oil & gas companies. On the other hand, food, healthcare and personal-goods shares have been weakening. Since its peak on Sept 4, the Stoxx 600 food & beverage sector has fallen 7 per cent, while banks have soared 14 per cent over the same period.
The strong run in food-and-drinks stocks created an extreme valuation gap against beaten-down sectors like banks, when earnings started to disappoint. Just this month, Pernod Ricard and Remy Cointreau failed to impress, while Danone was sanctioned heavily and cast further doubts on the industry's ability to keep delivering strong earnings growth.
AB InBev also cut its forecast on Friday. The valuation gap between the sectors in terms of 12-month forward price-to-earnings ratios narrowed from 2.9 to 2.3 since mid-September, but is still far from its 10-year average of 1.8.
If the relative performance of value stocks against growth equities is closely linked to bond yields, the same can be said for how F&B fared against the broader market. In fact, the sector has lagged more severely than the bond-yield move would suggest. Defensive sectors usually outperform in times of uncertainty.
With no improvement in PMIs and with the ECB highlighting the downside risks to the economic outlook, some reversal is still possible.
Looking at the long-time laggards on the other end of the spectrum, some investors like UBS Wealth Management justify their overweight on financials as a tactical one, driven by the valuation gap. Many on the sell-side, however, have been advocating for a switch to value as a longer-term trend. The continuation of the move may well depend on monetary and fiscal policy, as well as the further removal of some overhangs like Brexit and trade tensions.
The issue then is whether the market move is pricing in too much hope. Citi economists say asset valuations have now incorporated market expectations for further policy easing.
Not everyone is optimistic. For the fourth quarter, David Riley, chief investment strategist at BlueBay Asset Management, has cut his equity allocation to the lowest possible level, while raising the cash weighting to the maximum. The strategist is sceptical about the ability of the ECB to boost euro-area growth and inflation.
The Markit iTraxx credit index, often a good gauge of market risk, has not tightened as aggressively as the equity market has risen. BLOOMBERG
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