The investment mantra of "stay defensive," which wary market watchers have clung to in the wake of last year’s brutal declines, is faltering, and cyclical stocks are set to take over as the economy shows tentative signs of recovery, Tammo Greetfeld, senior equity strategist of UniCredit, said in a research note.
Many investors sought the relative safety of defensive sectors, such as health care and tobacco, in the hope that they would ride out the economic downturn better than the more economically-sensitive stocks.
Most have been proved right and sidestepped the sharp declines suffered in sectors such as basic resources and chemicals, though even the defensive sectors have lost ground during the recent turmoil.
But markets are on the cusp of a change, according to Greetfeld, and staying with the lifeboat-like defensive sector, could mean investors miss the party yacht passing by.
Greetfeld said that leading economic indicators are due to stabilize and points to the Purchasing Managers' Index in the US and manufacturing data in China to back up his claim.
A recovery in the Baltic Dry Index, coupled with stubbornly low commodity prices, also bears out the view that cyclicals are due for a bounce, according to Greetfeld.
Easing implied volatility and corporate bond spreads are also pointing to stabilization ahead, he said.
Greetfeld is "overweight" on basic resources, chemicals, construction & materials, insurance and utilities. He is keeping clear of financial services, food & beverage, health care, industrial goods & services and retail.
He is expecting the approach to reap rewards in the second quarter of 2009.
Companies on Greetfeld’s buy list include BASF, K+S, Bayer, Klöckner, BMW and MAN.