After a ridiculous rally (which only recently has shown signs of stuttering) UBS is turning cautious.Specifically they argue that “defensive” sectors have gotten very cheap relative to higher-beta cyclical names.
Here are their three conclusions:
* More balanced performance ahead: Performance of cyclical sectors relative to defensives is apt to be more balanced going forward. Indeed, the duration and magnitude of cyclical outperformance has already lasted longer than history would suggest. This is largely explainable given the severity of the downturn, the strong rebound in earnings growth from cyclical sectors and the manner in which global growth surprises reaccelerated over the back half of 2010. However, we anticipate sector returns will be less delineated along cyclical-defensive classifications as we move forward.
* Sector allocation changes: Given these views we advocate a rotation away from a more cyclically-weighted portfolio, which we have been holding since last July. As such, we upgrade the global Telecoms sector to neutral from underweight, and downgrade Technology to neutral from overweight. We also downgrade Consumer Staples to underweight from neutral, on concerns over valuations and optimistic margin expectations.
* Regional allocations unchanged: We remain positive about the outlook for growth in Global Emerging Markets but do recognise that inflation and policy worries, as well as the recent Middle East turmoil, present near-term challenges. We are also tactically overweight Japan given improving economic conditions and expectations for yen weakness and easing deflationary pressure.
On the other hand, while European market valuations appear reasonable relative to the world, we remain underweight given lingering pressures in sovereign debt markets.
Here’s a look at their current advised sector allocations: