So-called cyclical sectors including autos, capital goods, retail and banks “can show another leg lower,” strategist Mislav Matejka wrote in a note, as he also expects bond yields to retreat. Higher yields have typically correlated with a rally in these stocks, he said.
After outperforming defensive sectors until early-August, cyclical stocks have come under pressure as figures showed a worsening contraction in private-sector activity in the euro area. At the same time, data from China — which is a big market for sectors such as mining — highlighted a slump in exports, weak consumer spending and a growing property crisis.
Matejka said cyclical stocks had also missed out on the boost from a recent surge in yields because these rose for the “wrong reasons” — a downgrade of US government debt by Fitch Ratings and lower demand for bonds rather than solely due to receding calls for a recession in the world’s largest economy. He expects yields to retreat into the year end and sees defensive sectors gaining further.
The strategist had correctly predicted an outperformance of value stocks over growth sectors last year. However, his view that the market would peak in the first quarter of 2023 proved incorrect as stocks rallied through the first half. Market forecasters are also cautious on the outlook for European stocks more broadly. A recent Bloomberg poll showed strategists expect the Stoxx 600 to end the year around 453 points — relatively unchanged from its Monday close.
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