With central banks remaining in easy monetary policy mode and with signs of a recovery – most notably in the US and the UK but also to some extent in the eurozone – visible, analysts have been betting on stocks rather than bonds, at least until the end of the year.
Rotation between sectors is “extremely frequent” as investors try to get additional gains before the year-end by switching to underperforming sectors, strategists at Libra Investment Services said.
“The level of sector correlations is now the lowest for five years, so picking the right sectors remains important,” they wrote in a market note.
Their favourite is the auto sector, where their European stock picks are French carmaker Renault and tyre producer Michelin, German truck and car maker Daimler, and British automotive and aerospace parts maker GKN.
“We have made 5.5 percent relative on our buy Autos /sell Energy call over the last month,” the strategists said. “We stick with our buy on the Autos, which has worked well over that period with 2.5 percent outperformance versus the Stoxx 600.”
The auto sector still sees steady rises in fair value and intrinsic value, although it is on a 4 percent premium to fair value, slightly high “but acceptable given the rise in value.”
“However, the sector is now one of the few trading towards the top of its 12 month range, so we would consider taking some profits on any significant rally,” the strategists added.
Looking at the gap between fair value and sector price performance since the beginning of 2013, travel, technology and banks seem to be the most attractive from this point of view, with fair value growth ahead of prices.
In the resources sector, prices have fallen by much more than fair value, while the real estate and construction sectors also show fair value exceeding price performance.
In the energy sector, stock prices have increased while fair value has decreased since the beginning of the year.
The strategists reiterated their sell call on European telecoms.