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Don't rush to buy the dip in European cyclicals, says Barclays

Wed 15 May 2019 12:17 | A A A

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(Sharecast News) - Don't rush to buy the dip in cyclical stocks, Barclays said in a European equity strategy note on Wednesday.

It said that while cyclicals have sold off and are now closer to being oversold than overbought, tariff headlines remain messy and the gap with PMIs and bond yields that opened year-to-date has not closed.

In order for the gap versus fundamentals to close, one of two things would need to happen.

Activity would need to pick up significantly, Barclays said, adding that this is unlikely in the very near term as the renewed trade uncertainty might delay the widely anticipated second-half recovery.

The other thing that would need to happen would be for cyclicals to give back more of their recent outperformance. "We think this is the more likely route," the bank said.

It also noted that despite their underperformance in the last few days, cyclicals' valuations are near the top of the range, as earnings per share revisions have not rebounded much.

"Q1 results generally came out better than expected, but cyclicals' delivery was not impressive," it said.

"Positioning on the space is not bearish, as cyclicals' ETFs received more inflows than defensives year-to-date in Europe. PMIs and bond yields have not confirmed the risk-on trade: investors widely expect growth to rebound in H2, but leading indicators remain mixed at best.

"Eurozone PMIs are well below the level implied by cyclicals, while in the US, the latest ISM fell to the lowest since October 2016, and in China, PMI was down again in April. Bond yields remain stubbornly low and are not decoupling from leading indicators. As central banks stay put, the search for yield keeps supporting income plays. Energy, mining, healthcare, utilities, insurance and real estate are our preferred dividend payers."

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