As we progress through a very busy reporting calendar, the global macro backdrop has been supportive in recent weeks for equity markets in general.
Overall, markets have anticipated more subdued earnings expectations leading into reporting season given the challenging conditions for domestic companies.
It was clear that heading into the key semi-annual event that it was a tough operating environment and therefore difficult for companies to produce consistent, quality profits across the sectors. The challenges won’t go away in a hurry.
The current environment is a reminder that investors are still keen to chase expensive defensives (i.e., stocks that generally provide stable earnings during challenging stock markets. For example, health care.) despite the discount to some large-cap quality cyclicals (i.e., stocks that generally move in line with the ups and downs of the economy. For example, mining stocks) . Avoiding the value trap will keep investors alert in the next week of reporting.
Ultimately, there are, as always, winners and losers in reporting periods, but the worst of the local downgrades, across the sectors, look to be behind us given the additional stimulus working through. However, that doesn’t imply double-digit earnings growth in the year ahead either.
Given that defensive sectors have performed so well over the past year, investors need to search for value going forward and there is plenty of value in the traditional more cyclical sectors. While not exhaustive, Table 1 shows a few cyclical names across a number of sectors that tend to have more leveraged earnings through a cycle.
Table 1: A snapshot of stocks in the more cyclical sectors
[1]Materials, energy (resources in general), diversified financials, consumer discretionary and industrials are all traditional cyclical; sectors that exhibit more leveraged earnings through a cycle.
The key is to avoid value traps and the current reporting period is very valuable – particularly the outlook statements, which ultimately give investors more clarity on future earnings expectations.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.
Also in the Switzer Super Report
- Peter Switzer: The market game changer is arriving [2]
- Lance Lai: All is not well in the global markets. Here’s why [3]
- Rudi Filapek-Vandyck: The broker wrap: double the downgrades [4]
- Paul Rickard: Road test: a product for the cautious [5]
- Tony Negline: Eight new guidelines for valuing assets [6]