In the short-term there has been a decent bounce in European cyclicals, leading many to speculate on further outperformance. As can been in the table below, early cyclicals have been the leadership group in Europe year-to-date, with late cyclical industrial and material sectors close behind.
MSCI Europe Sector Performance
Does this recent burst of cyclical outperformance signal new leadership in Europe? Or, is this just a counter-trend move in the midst of a longer-term structural trend?
In the attached chart package we break the MSCI Europe into 4 basic baskets:
1) Early Cyclicals – consumer discretionary
2) Hyper Cyclicals – financials and technology
3) Late Cyclicals – industrial, material and energy sector
4) Counter Cyclicals – staples, health care, telecom, utilities
5) Growth Counter Cyclicals – health care and staples
We show numerous relative performance comparisons of these baskets over the last five years. We draw trend lines to help illustrate the long-term, structural trends. It appears to us that, so far, the bounce in European cyclicals is a counter-trend move in the midst of a long-term downtrend. Early cyclicals are an exception because they have been the one cyclical basket that has been in a long-term trend of relative outperformance; so, the outperformance of early cyclicals is an extension of an existing structural trend. But, for all other cyclical groups that are in long-term relative performance downtrends, the recent bounce looks more like noise than signal. Growth counter-cyclicals and early cyclicals are still the areas to focus on in Europe.
Download the charts here: MSCI Europe Baskets Relative Performance.