Where to Invest: Cyclicals vs. Defensives

The market may have lurched lower in recent weeks, but investors are still talking about a two-speed market

Cherry Reynard 3 July, 2013 | 11:00AM

The market may have lurched lower in recent weeks, but investors are still talking about a two-speed market. On the one hand are the high quality global companies that have led markets almost without pause since the global economic crisis started. On the other are cyclicals, which have been widely unloved because there has been precious little economic growth around. The question for investors is whether to use the weakness in markets to stock up on high quality companies, or whether cyclical exposure makes more sense.

Over the shorter term and during the recent rally, cyclicals have had a stronger run. Over the past year, among the best performing sectors have been the FTSE 350 Technology Hardware & Equipment sector, up 53.5%, with general retailers (50.2%), banks (44.8%) and travel & leisure (43.2%) all standing their ground. However, some cyclical sectors—notably mining and industrial metals (down 6.3% and 48.2% respectively) have lagged. Equally, over the longer term, high quality defensives have a significant edge. The life insurance sector is up 97.4% over three years, beverages by 89.4% and household goods by 84%.

Unquestionably, cyclicals still have the edge on valuation. Value managers Nick Kirrage and Kevin Murphy, managers of the Schroder Recovery fund (rated Bronze) point out that although some cyclical areas—housebuilders, selective retail, banks—have performed well, they are far from being widely loved by investors. Kirrage says: "The reality is they started from extremely depressed valuations and so it is not as if either sector has become the darling of the market again. A lot of that has to do with the fact that, while most investors have just about come to terms with the idea the world is not ending, there is still a lot of uncertainty."

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Finsbury Growth & Income Ord851.00 GBP-0.23
Schroder Recovery A Acc164.30 GBP-0.54

About Author

Cherry Reynard

Cherry Reynard  is a financial journalist writing for Morningstar.co.uk.

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