In an equity strategy piece from Goldman Sachs, the firm noted that despite the recent outperformance, cyclical stocks have lagged defensives by unprecedented margins given the overall strength in the market.
"At 14x forward earnings, the average cyclical trades at a 20 per cent discount to the average defensive, a valuation gap that remains extremely wide by historical standards. While we forecast a relatively modest 7 per cent market return this year, we expect stronger returns from a cyclical catch-up,” the broker said in the report.
Against this backdrop, Goldman Sachs is recommending being overweight early-cycle domestics that are leveraged to global growth. In particular, it’s recommending overweights in non-bank financials (SUN, HGG, IAG), materials (ORI, IPL, AMC), transports (AIO, BXB, TOL), diversified resources (BHP) and building materials (FBU, BLD).
Looking ahead, the broker believes that investors will increasingly rotate from high-yield defensive names into stocks that offer a better mix of income plus growth, given the improving economic outlook and stretched defensive valuations.
While staples offer a lower yield when compared to REITS, they are expected to deliver superior dividend growth going forward and remain the firms pick for yield plays.
Elsewhere, Goldman has upgraded the steel sector to neutral and downgraded gold to underweight on the premise that downside risk to US growth has been removed.