UBS Equities-Global Equity Strategy _Lighten up on some cyclicals – don’t...-117141071

ab8 August 2025Global ResearchGlobal Equity StrategyLighten up on some cyclicals – don’t ignore all the defensivesWe are overweight financials (see our recent note on banks) and tech (see key conclusions), electrification and domestic European consumer (retailing, budget airlines, German infrastructure). But we think it is appropriate to lighten up on cyclicals outside of these areas in general and electrification names may tread water near term. Our concerns are:1) Macro: i) Cyclicals (ex tech and financials) and PMIs move very closely together and currently they are discounting a rise in PMIs and US economic surprises, yet UBS sees US domestic demand slowing from 2.3% YoY in Q2 to 0.5% YoY in Q4; ii) this year, cyclicals and bonds have moved in the same direction 90% of the time – UBS forecasts a 3.8% US 10-year bond yield at year-end; iii) if US short rates fall more than long rates (as UBS forecasts), and we get a soft landing, then software and household products are likely to be the best performing sectors.2) The market backdrop: i) implied intra-index vol is close to the bottom end of its range – when it rises, cyclicals have tended to underperform 84% of the time; ii) we continue to think August will be a down month as US growth slows but the Fed can't cut until September (CTA positioning is abnormally high).3) Factors independent of macro or economic cycles: i) the P/E of cyclicals (ex tech and financials) versus defensives is 1.8 std above its norm in Europe and 1.4 std above in the US (P/S 1 std above its norm in Europe, 1.7 std in the US) – semis, capital goods and commercial services are more than 1std expensive (only paper and transport are more than 1std cheap); ii) Cyclicals (ex tech and financials) are discounting a large improvement in earnings revisions; iii) with the exception of paper and luxury, cyclicals are crowded; and iv) cyclicals normally underperform from August to end-Oct.Defensive sectors that score well on our screens are: beverages (we are benchmark), healthcare equipment (overweight) and household products (move to overweight). Our preferred defensive sectors remain: parts of utilities, healthcare equipment, software and flavouring companies, non-US defence (India, Japan), European telecoms and UK food retailing (Alcon, Abbot, DSM, Boston Scientific, Orange, DT, BAE Systems, Tesco, MSFT, SAP, Air Liquide, ENEL, ELIA, RWE, Entergy, NiSource and ConvaTec – of which Abbot, BAE and MSFT are Super eCaps on UBS HOLT). We think defensiveness is high profitability but low volatility of CFROI (i.e. Super eCap on UBS HOLT); this would highlight Reckitt Benckiser, ABI, Reply, Abbot, Danaher, J&J, MSFT, Oracle, Costco and HCA Healthcare (all of which have had positive earnings revisions in the past three months).We raise household products to overweight – the global sector is now 2.9 std cheap (trading 30% below its normal P/E relative to the market); it is also 10% oversold relative to the market; the European sector