Why the best way to play an economic recovery is to load up on industrial stocks, according to a Wall Street stock chief

Brendan McDermid/ReutersLori Calvasina speaks at the Reuters Investment Outlook Summit in New York, June 10, 2008.
  • Lori Calvasina, RBC Capital Markets head of US equity strategy, told Bloomberg that investors looking to buy cyclicals should load up on industrial stocks and avoid financials.
  • Low interest rates remain a long-term concern for financials, while this is not an issue for industrials, she said.
  • Calvasina added she’s worried about the ESG headwind for financials.

Lori Calvasina, RBC Capital Markets head of US equity strategy, told Bloomberg on Thursday that investors looking to buy cyclicals should stick with the industrial sector over financials.

Calvasina said that low interest rates remain a long-term concern for financials. Industrials are “just as cheap” as financials, but investors don’t need interest rates to rise before this sector performs well. She added that the focus in the recovering economy will be getting people back to work, which will be reflected in the industrial sector. “Normal terms of consumer behaviour” will probably come later.

The Industrials Select Sector SPDR ETF XLI was up 0.01% Thursday at 11:50 a.m. ET, and the Financial Select Sector SPDR ETF XLF traded down 0.60%.

“Financials and industrials are the two that tend to trade most in sync with the ISM cycle. So those are your two pillars of cyclicality. That doesn’t mean that relationship will always be there, but if you want cyclicality without going a broad-based value trade, you can do it through the industrial sector,” Calvasina said.

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In addition, Calvasina said the “ESG headwind” on the financials side is worrisome. ESG funds tend to be underweight financials, and the sector doesn’t score well on governance issues. This is a trend that has been growing through the pandemic, she said.

“I see multiple reasons, some having nothing to do with the pandemic, nothing to do with the cycle, for why you might not want to be overweight financials right now,” she said.

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