Rotation Has Analysts Re-Rating Stocks, Just Not as Expected

  • Cyclical companies, among biggest gainers in 2017, downgraded
  • Defensive shares upgraded, causing recommendations to converge

What Are Traders Watching in Global Markets?

The rotation from defensive stocks into cyclicals is leading analysts to re-rate European companies, but not always in the direction you might expect.

While the average rating in Europe’s Stoxx 600 Index is little changed since June, the more defensive utilities and food and beverage stocks are among the most upgraded as the shares retreat. The more-cyclical bank, insurance and chemical stocks, surging this year, are among the most cut.

The table below shows average analyst ratings converted into numbers with ‘one’ equating to a sell recommendation and ‘five’ to a buy. The average rating for utilities has climbed 0.19 over the past six months, compared to a 0.10 decline for insurers.

SectorDecemberJuneChange
Basic Resources3.423.21+0.21
Utilities3.583.39+0.19
Food & Beverage3.723.54+0.18
Banks3.473.66-0.19
Chemicals3.423.60-0.18
Insurance3.423.52-0.10

Analysts have been more bullish on defensive stocks for most of the year, and are maintaining that stance even after the rotation stoked a more than 30 percent rally in bank stocks post-Brexit. 

Average consensus rating for European equity sectors (1=buy, 5=sell)

After so-called defensive sectors, including health care, real estate and food and beverage, each fell more than 3 percent in the period, analysts may now be judging they are oversold and cyclical shares overbought.

The basic resources sector, usually a cyclical bet, bucked the trend and was upgraded even as stocks rallied more than 50 percent since Brexit.

Sector performance since Brexit vote

Although ratings often lag price action, analysts appear to be less sanguine than the market on the recent moves in cyclicals and more optimistic on the outlook for defensives. Deutsche Bank AG strategists including London-based Sebastian Raedler told clients last week it may be too late to chase the rally in cyclicals.

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