Whatās Going On Here?Sit straight and face front: investment bank Morgan Stanley analyzed investorsā favorite UK sectors late last week, and we reckon there are valuable lessons for the rest of the world to learn. What Does This Mean?Morgan Stanley found that retailers and industrials firms were ārelatively overvaluedā, meaning their share prices compared to profits looked much higher than those of other industries. Meanwhile, the bank found that ādefensiveā sectors like food, beverages, and tobacco ā where demand for products tends to be pretty stable no matter what ā were undervalued, suggesting investors havenāt yet taken their resilient earnings into account. Oil and gas stocks were deemed undervalued too, but that might be because itās one of the most āoversoldā sectors. In other words, share prices have fallen so far ā partly because of low oil prices and weak earnings ā that some analysts think theyāre now poised to bounce back. As for the overbought sectors, Morgan Stanley reckons they include ācyclicalā industries ā like mining and business services ā that'd benefit most from an improving economic outlook. Why Should I Care?For you personally: Tools of the trade.
Exchange-traded funds (ETFs) can track medleys of different types of assets, including stocks that might be considered defensive or cyclical, or those grouped by industry. Picking individual stocks is inherently risky, so an ETF that helps spread your risk across several companies is a good bet for most people. And knowing what the pros have been up to ā and why ā might help you set up and adjust your portfolio appropriately.
The bigger picture: Mind the gap.
According to Goldman Sachs, ācyclicalsā look even less attractive versus their defensive counterparts than they historically have done if you exclude tech stocks. But Goldman doesnāt necessarily think that means cyclical stocks wonāt rise further. In fact, the bank reckons US stocks could still rise another 7% ā in part thanks to cyclicals ā if investors become even more optimistic about the future. | 