We continue to see signs that the global industrial cycle is turning and this appears to be reflected somewhat in equity market performance, with a more risk-on pattern emerging and the stellar run from defensive income trade/low volatility trade underperforming recently. Earnings expectations for cyclical companies are so low that we are seeing fewer downgrades, but they continue to trade at a very large discount to ‘high quality' defensives. However, the market is starting to show renewed interest in value/cyclical firms. In our view, the implication of this is that the S&P/ASX 200 may struggle to perform in a more risk-on environment initially given 'high quality' defensive assets now significantly outweigh cyclically leveraged firms. Higher interest rates would be devastating for the expensive, quality, low volatility, bond-sensitive stocks. In our view, if this environment continues, value as a style is likely to outperform in the near future. (VIEW LINK)
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