The FTSE 100 is Europe’s “tail-end Charlie”, says Neil Hume in the Financial Times. Since markets troughed in March, it has lagged all its major European counterparts, tailing Germany’s DAX and France’s CAC by 8% and 6% respectively.
The main reason for this, as Hume points out, is that the British blue-chip index has a greater weighting of defensive companies – those that are seen as largely immune to the economic cycle. A third of the FTSE 100’s constituents are defensive.
The DAX, meanwhile, is one of Europe’s most cyclical markets, with almost half of the stocks in the index sensitive to the business cycle. Four of the DAX’s top ten firms are cyclicals, but only one of the FTSE’s is. So with investors now positioning themselves for recovery amid improving data, cyclical stocks are thriving and less economically sensitive stocks and indices are falling behind.
Neil Woodford of Invesco Perpetual describes the share price rises and valuations of cyclicals as nothing short of “astonishing” – especially given that there’s been “no tangible sign of any improvement in profitability for many months now”. Meanwhile, investors have “really taken against” defensive sectors, with many such firms looking “incredibly attractive”. Investors are clearly betting on a V-shaped recovery, he says.
But the “start of a period of sustained expansion in the economy is a hell of a long way away”. The imbalances that led to the crisis have barely been addressed. Consumers and businesses have only just begun working off their debt load and there is still too much leverage in the banking system. The higher taxes and lower government spending needed to cut the budget deficit also militate against an enduring rebound, says Jeremy Warner in The Independent.
With the economy facing a rough ride, there is “clear scope for sentiment towards more defensive sectors to improve”, says Cazenove’s Darren Winder. “Sooner or later” defensive firms’ resilience to a struggling economy should be “priced into their share prices”, agrees Woodford. So it’s time to load up on defensives.
Among the solid companies he likes is AstraZeneca (LSE: AZN), on a 2009 p/e of just eight and a yield for this year of 5.4%; and Tesco (LSE: TSCO), yielding 3.5%. And as we noted last week BP (LSE: BP) and Shell (LSE: RDSA) remain appealing on yields of around 6%.