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Source predicts cyclical sectoral recovery

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The poor performance of equities in the third quarter of 2015 might be the trigger for a cyclical recovery in some sectors according to ETP provider Source. 

The firm’s research suggests that some of the more cyclical sectors in the US and European equity markets may be best positioned for a market recovery in the final quarter of the year. The latest edition of the Source Sector Selector weighs up the recent market performance, with the reasons for the weakness driven primarily by concerns about global economic growth, especially with current fears around China.
 
While acknowledging the deceleration in the Chinese economy, Paul Jackson, Head of Multi-Asset Research at Source, believes that global growth will be sufficient to allow equities, real estate and high yield corporate bonds to outperform government and investment grade bonds.
 
Jackson says: “When we assess equity valuations, we believe it is appropriate to use different metrics for the US than for Europe.  In the US, we are focusing mostly on price-to-cashflow ratios, whereas we are emphasising dividend yield for European equities. The European market as a whole requires dividends to grow by only 0.5 per cent per annum to justify current equity valuations. Overall, our analysis shows that banks and resource-related sectors are some of the cheapest in both the US and Europe, while defensive sectors are currently among the most expensive. Utilities, a stereotypical defensive, is also the most leveraged sector in Europe, with net debt of 3.2 relative to EBITDA.
 
Cyclical sectors that may be worth considering include consumer discretionary in the US and European media companies, as well as industrial goods and services in both markets. We also continue to favour financials in the US and Europe, where valuations and price momentum are both particularly attractive. The one exception is in the financial services area in the US, due to less compelling valuations and profitability. Where we are less positive is toward basic resources, as we remain unconvinced that the commodity super-cycle has completely unwound.”

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