Exposure rates of the Dorval Asset Management Range – 8th April 2019

So are we in the midst of an economic recovery or not ? The latest business surveys suggest that the world economy was on the up for the second month in a row in March, and while this is admittedly not enough to jump for joy yet, a stabilising Chinese economy and the prospect of a US-China agreement definitely mark a vast shift in the situation compared to last year.

This could have a major knock-on effect for the world economy over the months ahead, driving a stock-market outperformance for the most cyclical stocks in our view (cf. chart 1).

Is this the start of an outperformance phase for cyclical stocks?

World activity PMI (LHS) / Cyclicals vs. defensives ratio (US, Europe & Japan – RHS)

However, this optimism now needs to make it as far as Europe, where concerns remain high. We still stand by our position on the region i.e. we feel that observers tend to blow the euro area’s economic weakness out of proportion, where difficulties are narrowly focused on a few industrial sectors, including automotive. The most domestic sectors remain robust, such as consumer spending and construction, even in countries like Italy, and neither ultra-accommodative monetary policy nor current fiscal policy – a far cry from the austerity of the past – warrant pessimism. European cyclical stocks, be they small-, mid- or large-caps, have started to pick up, although the question now is whether this trend can spread to the European market’s most struggling cyclical sector i.e. banks. Nothing can be taken for granted at this stage, as the sector is still hampered by severe headwinds. However, it is worth noting that the EuroStoxx Banks is moving close to its 200-day moving average, and a clear upswing followed both times it hit this mark in recent years – in the summer of 2012 and in late 2016. We obviously cannot tell what the outcome will be this time, but a comeback for banking stocks would undoubtedly be seen as a clear sign that the prolonged period of investor wariness on Europe had come to an end. To be followed…

European banking stocks close to test point

200-day moving average / EuroStoxx banks index


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