Improving global macro-economic data – especially in Japan and the peripheral Europe – may start to shift investor preference towards more cyclical, high-beta sectors, the multi-asset strategist said.
“Japan came out of a self-inflicted recession and the eurozone data are surprising on the upside,” he said.
“Especially peripheral euro countries are doing well. This marks a difference with 2014 where economic growth was mainly concentrated in the US and in the UK. In Japan, the increase of the sales tax led to a new recession and the eurozone was struggling with its structural and deflationary challenges.”
ING Investment Management has subsequently adapted its asset allocation with a clear preference for consumer discretionary, which it believes will benefit from the drop in oil price, better credit conditions and improvements in labour markets.
Another favoured sector is technology, which Moonen asserted usually performs will in periods of rising interest rates: “Companies are cash rich and the large cap segment is not expensive. We also expect solid dividend growth. Finally, it is a sector that has proven to be able to cope with pricing pressure.”
In contrast the team is underweight utilities and consumer staples, with stocks in the latter expensive looking expensive and not offering much earnings growth.
Moonen also supports his selection with trends in long-term bond yields: “2014 and January 2015 was all about the search for safe yield caused by the unprecedented decline in bond yields. In addition, mainly due to the drop in the oil price, alternative sources of yield (corporate high yield and EMD) became less attractive.
“More recently, global bond yields have started to rise. Cyclical sectors closely followed this trend. In our view this is probably the most important driver behind the cyclical outperformance.
He added: “This can be explained from two angels. First rising yields and a steepening yield curve are signs of a better economy. Second, it increases the discount factor of future earnings which punishes defensive sectors more than cyclical sectors given the timing of their cash flows.”
