Are cyclicals on the radar yet?
Investment Solutions | Market Insights

Paul Ashworth, Managing Partner

The simple answer is yes, but only just. However, we expect the environment for cyclicals will look quite favourable in the latter part of 2024.
Posted 14 March 2024

To hear Paul's thoughts, watch the interview below. A summary follows.

In the US, EPS estimates for goods producers have been revised down from the estimates of last year, and now better reflect historical relationships with the US ISM manufacturing index which has been tracking below 50 for some time now. This, of course, contrasts with upgrades in the overall US equity market, which are almost wholly attributable to the nifty 7.

The nifty 7 group is somewhat diverse across communication services, consumer discretionary and the very in favour, information technology. So there is a clear dichotomy between the nifty 7, the S&P493 and then industrial cyclicals. The nifty 7 require perfection in internal execution and external environment. We do not believe perfection exists and therefore see better risk-adjusted returns elsewhere in the US equity market.

At Cameron Harrison, we have been reasonably consistent over the last few months stating that in an environment of lower GDP growth and moderating inflation, interest rates should slowly move downwards.

What perhaps differentiates us from many is our view that interest rates will settle higher than equity markets expect. We hold this view due to the dual occurrence of low unemployment and sticky wages growth pressing on inflation.

In the US, wages growth is still around the 5% mark, when a level of 3.5% is required to support a 2% inflation rate target. Labour productivity in the US has led the developed world over the last 20 years as has lower corporate tax rates and lower wages share to GDP. With electoral shifts favouring government intervention, higher government spending, onshoring and protection and higher wages, there is a very good argument that businesses will (have to) focus on capital expenditure (capex) to drive productivity.

It is in this context that we view the medium to long-term environment for cyclicals and in particular, goods producers, as favourable. Whilst this dynamic should exist in Europe as well, we can only see that US corporates have the strategic force and ability to grasp this imperative and shift in the capex cycle. Whilst only just on the radar, US industrial cyclicals should be on investors' radar.

Cameron Harrison’s Partners have managed a Core Global Equity Strategy for just on 20 years – an enviable record. Predominantly exposed to US equities, the strategy has exceeded the MSCI ex-Australia (AUD) over 1,3,5 and 10 years. Importantly, it does so by avoiding market capital weighting concentration risk and instead focuses on a disciplined scoring system for quantitative factors and our own proprietary ‘business success framework’. This delivers our clients a quality set of businesses with portfolio construction well set up to manage downside risk – an important attribute as US equity markets approach all-time highs on the back of a handful of companies.

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