MARKETS SPECTATOR: Cyclical stance

Given the continuing improvement in the growth backdrop, UBS continues to recommend rotating towards cyclical sectors and stocks within portfolios.

UBS believes the global backdrop has improved in recent months. Tail-risk from the eurozone has been reduced and there are now tentative signs of improved economic momentum in the US and China.

Stocks have rallied in light of this better backdrop but nevertheless still look very cheap versus bonds. In our view the improvement in macroeconomic data suggests there is potential for equities to push higher after the current consolidation runs its course.



UBS notes that the improving growth backdrop suggests retaining a pro cyclical/beta stance within portfolios. The cyclicals/beta rotation should continue given: 1) improving global growth; 2) the extent of underperformance this year and; 3) the attractive signal on relative valuations (safety looks relatively expensive).

UBS retains a tactical overweight on mining/resources based on an expectation of a further bounce in the iron ore price, moderately better China growth momentum and a generally improving tenor to global growth. It also sees value in industrial materials with Incitec Pivot and Orica key picks.

The US recovery remains an attractive theme though arguably the most leveraged play, James Hardie Industries, is very expensive, UBS notes. It gains exposure to the theme via News Corporation, Brambles and Incitec Pivot.

In addition, UBS has added Caltex Australia, Challenger Limited, Perseus Mining, Primary Health Care and Westfield Retail Trust to its model portfolio. It has removed Alacer Gold, QR National, Resmed and Stockland Group.