Asia Pacific Equity Strategy:Cyclicals have outperformed defensives by 13.6%YTD in 2017;take profit?

Cyclicals have outperformed defensives by 34% from the August 2015 lows. The MSCI definition for cyclicals is Tech, Energy, Materials, Consumer Cyclicals and Industrials. Its definition of defensives is Staples, Utilities and Telcos. On this definition, Figure 1 highlights that cyclicals have out-performed defensives by 33.7% since the lows in August 2015, and by 13.6% YTD. Moreover, Figure 2 highlights that the PB gap between cyclicals and defensives has narrowed from a low of -0.82x two years ago to 0.01x now. The key question is whether to take profit.

    We still think NOT yet for three reasons. One, the ROE gap between cyclicals and defensives has now moved in favour of cyclicals. Figure 3 highlights that while cyclicals ROE trailed defensives ROE by 2% in April 2016, currently cyclicals ROE exceeds defensives ROE by 0.2%. Two, the ex-Tech cyclicals to defensives PB gap is still a large -0.79x - bigger than the historical average of -0.54x. Three, if we remove the recently listed US ADRs from Tech, then even the Tech PB gap versus defensives falls from 0.68x to 0.24x.

    Overweight Cyclicals versus defensives. We continue to Overweight cyclicals (large Overweight in Tech and smaller Overweight in Materials) versus defensives (large Underweights in Healthcare and Staples).