Market fears have moved from rising bond yields to peak momentum story (peak of PMI, ISM, IFO, etc.), exacerbated around the US tariffs topic since early March. Hence the question about this ratio. Looking at this chart, the first impression is that the ratio of Cyclicals / Defensives is becoming stretched. Looking into more details, we note a differentiation depending on the inclusion or not of IT within Cyclicals.
The picture highlights some similarities with the late 1990’s with 2 differences: the first one is that the profitability of Tech companies this time is much stronger than during the internet bubble. The second is that there is more diffusion to other sectors. Amazon, Netflix and Tesla for example represent 20% of the market capitalization of the MSCI World Consumer Discretionary (included in the Cyclicals ex-IT index displayed in this chart).
Two remarks and one conclusion:
- Even if expensive, Tech companies are outperforming for good reasons, as their earnings momentum is stronger that for the rest of the market. What could stop the supremacy of Tech companies in this cycle? We should look closely to what is happening in terms of regulation, which could “disrupt” these disruptive companies, more than cyclical issues.
- Looking at Defensives, we have to differentiate between those which are sensitive to interest rates and the other ones.
- As volatility increases in a context of rising rates, adapting the risk profile of portfolios by reducing the underweight of non interest rates sensitive Defensives at the expense of non-tech Cyclicals could make sense.