What is the trade off over cyclicals vs defensives? via UBS

Amidst the ongoing macro turmoil, UBS notes that the risks around inflation/rates, growth/recession and earnings/margins, an increasingly favors take more neutral stance on cydicals vs defensives, and focus more on relative value industry group winners.

Particularly, the decomposition analysis shows that risk-averse appetite indicators such as VIX index, are driving performance much more than actual macro factors regarding markets' expectations for the relative strength of near-term price changes.

An inverted yield curve historically signaled 5% cyclical underperformance over the next 3 months, and a cyclical lag of 3% in the following year amidst fast Fed tightening cycles.

With that said, stagflation concerns could benefits select cyclicals such as Energy and Semis, while higher yields are an important counterforce for Financials.

In addition, cyclicals vs defensives have undershot macro drivers by 5-10% over the last 3 months, providing a supportive buffer.

Bank vs Insurance: Stark disconnects between Banks and real yields, and Banks become more sensitive while Fed funds rises significantly. Insurance outperformed Banks by 25% YTD.

Transportation vs Capital Goods: Sales go upside for transport, while rail volumes fell 10%.

Consumer Durable & App vs Retailing: Retail spending indicators are slowing. Limited housing supply is providing a support while homebuilders undershot.

Food & Staples Retailing vs Food, Beverage & Tocabbo: Supportive EPS momentum and better relative commodity input exposures.

Pharma & Biology vs Healthcare Equipment & Services: Valuations of Pharma are cheaper than Healthcare services, and drug store traffic is falling alongside COVID cases.