Not-So-Industrious European Industrials by Jennifer Thomson, Gavekal Capital Blog
Last week, we reviewed our ‘baskets’ of stocks and then took a more specific look at the performance of European Growth Counter-cyclicals and Health Care constituents, in particular. Another interesting relationship, which we discussed at length earlier this year, is that between our baskets and German bund yields:
In order for the high historic correlation between falling interest rates and the relative underperformance of European Cyclicals to be sustained, we would expect either 1. the recent back-up in yields moderates somewhat or 2. European Cyclicals should begin to outperform the overall MSCI World Index. Given the resurgence in uncertainty surrounding the situation in Greece (and investors’ subsequent preference for assets that appear relatively safe), as well as the rather uninspiring industrial landscape, we would not bet on option 2 as the most likely outcome. Today’s market action lends support to this reasoning, as European Industrials fell, on average, more than 3%. Other sectors that comprise our Cylicals basket were of no help, either:
On a longer-term (1008 days, to be exact) basis, the outlook for European Industrials appears particularly bleak. Those familiar with our point-and-figure charting methodology will note that the following formations in some of the most recognizable market leaders from the sector are NOT positive– and they don’t even incorporate the significant underperformance from today:
The widespread nature of these declining trends is concerning from a technical standpoint. What is perhaps even more alarming is that so many of these companies have no historic support, causing us to wonder how many of these downtrends will end up looking like free-falls.
