- It’s Still about Cyclicality — We are now underweight the most cyclically sensitive sectors: Industrials, Materials, Energy. While we upgrade the CEEMEA region to Neutral from Underweight — in large part because of an improved earnings outlook — this likely reflects a modest rebound in oil prices, which remain 40% below year-ago levels.
- Downgrade Industrials to Underweight from Neutral — The earnings outlook for Industrials has weakened further, at the same time that the sector’s relative
valuation has become less attractive.
- Upgrade the CEEMEA region to Neutral from Underweight — Likely reflecting a modest rebound in oil prices, the earnings outlook of the CEEMEA region (26% Russia) has improved after over two years of deteriorating earnings momentum. Relative valuations have also become more attractive, likely reflecting an easing in geopolitical tensions. However, renewed weakness in the price of oil and/or a resumption in geopolitical tensions could quickly change the outlook for the region.
Michael Geraghty is the Global Markets Strategist at Cornerstone Capital Inc. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.