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Alan Kohler is one of Australia’s most experienced commentators and journalists. Alan is the founder of Eureka Report, Australia’s most successful investment newsletter, and Business Spectator, a 24-hour free business news and commentary website. He also hosts Inside Business, a half-hour Sunday programme on the ABC, is the finance presenter on the ABC News - and producer of the nightly graph (or two).
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MARKETS SPECTATOR: Goldman's choice

Goldman Sachs sees cyclical stocks lagging defensives by unprecedented margins, and recommends an overweight position on sectors leveraged to global growth.

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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.

Comments on this article

Comments Policy

Lea Guy, Fri, 2013-02-22 04:21

Any punter taking advice fom this piece, should first read Greg Smiths's book Why I left Goldman Sachs, before taking on board Goldman's comments. ( Goldman's Choice , Feb 4th 2013)

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