In a new note, Morgan Stanley’s European team is getting defensive, and telling clients to go underweight industrial stocks and overweight the traditionally defensive telecom sector.
1) History suggests that defensives outperform post peaks in lead indicators and at the start of a new interest rate cycle.
2) Defensive sectors are very unpopular – European investors are now more underweight defensives than financials.
3) Over the last 40 years the only prior occasion when defensives had underperformed as much on a two-year rolling basis was in the 2000 TMT bubble.
4) Post poor performance, defensive valuations look increasingly attractive.
As for getting negative on industrials:
To fund our more positive view on defensives, we are going underweight Industrials as we believe the sector is one of the most vulnerable to an inflection point in the economic growth story and is relatively more exposed to building margin pressures.
This chart shows nicely what industries do best after the ISM peaks (signaling the end of the first stage of the recovery):
Photo: Morgan Stanley