In its latest CIO Office Viewpoint, global wealth and asset manager, Lombard Odier remains optimistic on cyclical over defensive stocks, given still-solid US and global growth, as well as superior company fundamentals.
Among cyclical sectors, Lombard Odier likes communication services, consumer discretionary and materials firms. Among defensives, healthcare remains the least preferred sector, according to senior equity strategist, Edmund Ng (pictured).
Cyclical sectors have a brighter fundamental outlook according to the bank, with, for example, sales of semiconductors robust and signs that demand for consumer hardware such as PCs and smartphones is recovering as a destocking cycle comes to an end. This trend could also be boosted by sales of artificial intelligence enabled devices in the coming quarters with new product launches.
Lombard Odier has also recently added consumer discretionary and materials to its list of most preferred sectors, amid significant relative share price weakness.
Conversely, high US healthcare costs and poor patient outcomes have now become a bipartisan cause, and it believes pressure on drug pricing will continue.
Many other defensive sectors also continue to face headwinds, said Ng. Listed real estate companies are struggling to refinance a wave of debt, and also face “stranded assets” in the market — primarily buildings that have lost their value due to poor energy performance, or that do not meet sustainability regulations.
Meanwhile, food and beverage companies continue to see flat or sluggish increases in volumes sold, as consumer prioritise their spending, according to Ng.
“Investors have a lot to cheer from equity performance this year. Many markets have recorded successive highs and volatility remains low at the index level. Yet after solid gains year-to-date, the argument for taking more equity risk now looks less appealing,” he warned.
The main risks to Lombard Odier’s sector preferences include a sharp US growth slowdown or a sharp rise in bond yields, leading to a reversal in current equity market leadership.
“While Lombard Odier sees few signs of speculative excesses that tend to coincide with the end of bull markets, investor risk appetite and positioning appear stretched, raising the risks of a short-term consolidation,’ Ng said.
Conversely, a move higher in interest rate expectations on the back of a strong reacceleration in economic growth could favour value and small cap stocks.
“For now, we judge such risks to be limited,” said Ng.
The attempted assassination of Donald Trump on 13 July should not fundamentally change this outlook, but looks likely to strengthen the momentum of sectors that could benefit from a second Trump term.
Nevertheless, the bank is keeping overall equity exposures at “strategic benchmark levels”, and continue to seek opportunities in regional, sector and individual stock selections.
