It was the sure-fire tip for 2017: a pick-up in global growth, supercharged by US President Donald Trump’s fiscal stimulus plans, made stocks that tend to profit from a cyclical economic recovery the place to be.
But a look at the sharemarket’s performance year-to-date reveals a sobering picture: most of the heavy lifting in the S&P/ASX 200’s modest gain of 1.6 per cent has been done by defensive sectors such as healthcare and utilities, while cyclicals such as materials, energy or even industrials are all flat to slightly lower.
One reason for the puzzling underperformance of cyclical stocks is that the gloss has come off the Trump factor, as evidenced most recently in last week’s oversized slump first on Wall Street then on the ASX in reaction to the delay of the Obamacare repeal bill.
The struggles in the US Congress have cast doubts on Mr Trump’s ability to pass pro-growth policies such as comprehensive tax cuts, one of the drivers of the global reflation trade – or betting on assets that profit from stronger growth, rising inflation and higher interest rates.
“The realisation has begun to dawn that this might not be plain sailing and some of the wind has been taken out of the reflationary sails, with investors readjusting back to some of the more defensive stocks and sectors,” said Tony Warburton, head of active quantitative equities Asia-Pacific at State Street Global Advisers.
But Mr Warburton added the positioning this quarter was more a reality check rather than an indication of a seachange in investment themes.
“Given the prevailing improvement in the US and global economy, we don’t believe this to be the end of the reflation trade, but hopefully a more measured reflection of changes in fundamentals and policy will come to the fore,” he said.
Indeed, most recent data suggest that the narrative of a broad-based global economic recovery remains intact. Growth spell
One indicator closely followed by economists are purchasing manager indices as these tend to be a reliable barometer for growth. The most recent set of manufacturing PMIs for leading economies, published on Friday, remain at or close to multi-year highs, including in .
At the same time, the much-anticipated rebound in corporate profits has materialised, in , in the US as well as in Europe, which is seen as likely to boost business spending.
The upbeat news suggested economies had arrived at an important juncture, said JP Morgan economist Bruce Kasman.
“The data flow is evolving in a manner similar to traditional cyclical upturns in which positive economic news is reinforced by rising confidence and supportive financial conditions,” he said.
“Generally these have produced periods of more than a year in which global GDP has grown a full percentage point above trend, and manufacturing output has delivered even stronger performance.”
Macquarie analysts agree that it’s too early to abandon the reflation trade, saying they don’t see signs for growth rolling over or deflation making a comeback.
“We see this as a ??? catalyst to pull in our sector tilts but not a reason to get over-defensive in the bond proxies,” the analysts wrote in a note to clients last week.
“The pro-cyclical trade may have run a bit far, but thematically, a pro-reflation trade will remain the key macroeconomic drivers of relative performance for a few more quarters in our view. Nevertheless, the risk reward of being so one-sided has changed and a new catalyst is probably needed to reinvigorate the commodity trade.”
As a portfolio consequence, Macquarie downgraded miners to “neutral”, from “overweight”, but kept the faith in banks, which tend to profit from rising interest rates.