The dramatic rise in markets over the last two months has removed some of the lowest hanging cyclical fruit from the investor’s orchards, with some of the most remarkable rises coming from a reduction in perceived bankruptcy risk as bond markets have reopened, equity has been raised and investors start to believe that bankers may one day make another loan. There are still many opportunities in cyclical sectors, but some profits (100% to 300% in some extreme cases) are too tempting to turn down.
Luckily the upward move in the indices has not been mirrored in many of the ‘defensive’ sectors such as telecom and consumer non-durables. Many of these stocks have gone down substantially in recent months, resulting in ‘expensive defensives’ becoming ‘cheap defensives’ almost overnight. In many cases these now offer safe and highly attractive yields together with a fairly high degree of earnings certainty and PERs which have rarely been lower in either absolute or market relative terms.
We have substantially increased our exposure to these sectors, and feel that they will be attractive options for some of the cashed-up major institutions that have been wary of the rally but feel compelled by peer pressure to participate and do not want to buy anything that has enjoyed a major move from the lows already.
