Chart of the Week - Old Cyclical Stocks
Something new is underway in the old cyclical sectors in global vs US equities
There is an ongoing debate among portfolio managers and asset allocators when it comes to US vs Global equity allocations...
Some say the US market has it all, no need to bother with global stocks. And armed with hefty helpings of recency bias, they have been right on this view for the past decade — where tech-heavy US equities have strongly outperformed (not to mention a strong US dollar hurting returns of offshore assets).
Yet, proponents say global is cheap (and it is — cheap vs history, cheap vs US), offers diversification benefits, and undergoes long-term cycles of under/out-performance (and after 15-years of underperformance is due for a turn).
But here’s something else to consider…
As noted, the US market is heavily skewed to tech.
Meanwhile, what I call “Old Cyclicals“ (energy, materials, financials, industrials) have been squeezed out to multi-decade low market-cap weightings.
If you look at global stocks though, the weighting to Old Cyclicals is around *twice* that of the USA (see this week’s chart below).
Why do we care about this?
Several key themes are underway right now (global manufacturing reacceleration - restocking, trade rebound; global capex surge - reshoring, energy transition, geopolitics; commodities revival - supply constraints, demand rebound) — these themes will present strong tailwinds to the old cyclical sectors.
Indeed, you can probably make a case for a rotation or transition from services + software to goods + hardware. And this will show up bigly in old cyclicals relative performance — this is likely to be broadly bullish should these sectors become the new drivers of strength in the stockmarket.
But looking at this week’s chart, if you think old cyclicals are going to do well, then you want global stocks where the weightings are higher, the valuations are cheaper and flows have shunned. It’s a bit of a contrarian take, and not something many are talking about, but I sense it will become a key topic of conversation in coming months…
Key point: Sectors skews are likely to favor global vs US stocks as several macro-thematic tailwinds converge on the “old cyclicals“ sectors.
ALERT: Market Cycle Guidebook
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Topics covered in our latest Weekly Insights Report
Aside from the chart above here’s what we covered in the *entry-level service* — which is a summary version of the full service outlined above:
Bond Yield Outlook: tactical update on US/global sovereign bonds
GSV vs ULG: the case for Global Small Value vs US Large Growth
Global vs US Equities: the value case is there, but the macro?
Small Caps vs Large Caps: when is it time for small caps?
Value vs Growth: the hidden factors falling into favor here
NZ Equities: an update on the New Zealand market
Subscribe to the entry-level service to get instant access to the report so you can check out the details around these themes, as well as gaining access to the full archive of reports (or subscribe to the full-service
for a greater depth of insight, detail, and service).For more details on the service *check out this recent post* which highlights:
a. What you Get with the service;
b. the Performance of the service (results of ideas and TAA); and
c. What our Clients say about it.
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Thanks for your interest. Feedback and thoughts welcome.
Sincerely,
Callum Thomas
Head of Research and Founder at Topdown Charts
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