I watched a news clip on CNBC yesterday and JP Morgan Private Bank analyst Anastasia Amoroso suggested the great rotation in stocks we’re seeing could have only just begun. And that’s good news for the FTSE 100 if it proves to be correct because the index contains many cyclical stocks.
Cyclicals look set to power the FTSE 100 higher
The presenter made the point that the rotation from growth stocks to cyclicals (mostly in America) began around two-and-a-half months ago. But Amoroso insisted she believed the trend had several months and perhaps even quarters still to run.
I think it’s an intriguing theory that could have legs. Indeed, here in the UK, we’ve already seen something of a snap-back rally for cyclicals since the welcome news from Pfizer–BioNTech and Moderna regarding progress with their new vaccines for Covid-19. Indeed, with the prospect of an exit route from the pandemic, cyclical shares are moving to predict improved trading ahead.
Big movers on the London market include banks such as Lloyds and Natwest. And airline shares such as EasyJet, hotel and restaurant operators such as Whitbread, and food-on-the-go specialist Greggs. And I reckon there could be plenty of impetus still to come for cyclical shares as we move towards the end of the year.
There could be positive news ahead
For example, we may hear more news about vaccines either from Pfizer-BioNTech and Moderna or from other vaccine developers. And we could hear news regarding the UK’s Brexit Free Trade Agreement negotiations with the European Union. On top of that, the stock market looks ahead and is trying to predict what trading will be like for companies six and even nine months ahead. And in mid-May 2021, for example, we’ll be moving into warmer weather in the UK, which makes life harder for the virus.
I also believe changes in the government’s approach to dealing with the pandemic could help businesses. As I see it, there appears to be a gathering upswell of public opinion railing against lockdowns and the damage they cause to businesses. I reckon a policy of using lockdowns to suppress the virus may prove tough to sustain in 2021. Perhaps the government will find more creative methods of fighting the disease.
Meanwhile, heading towards the end of the year, we could benefit from the effects of a Santa rally in the stock market. Indeed, all of these things could be good for cyclical shares. And one of the great things about cyclical stocks is they can move quickly when economic conditions begin to improve. For example, in 2009 in the wake of the financial crisis, Barclays shot up from around 90p to 333p over a period of just six months.
More cyclical stocks I’d buy now
I think moves like those are worth targeting with cyclical stocks. But it’s worth noting that Barclays hasn’t been as high again since its initial upswing during 2009. That’s why I believe many cyclical stocks don’t make great long-term investments.
Nevertheless, I’d be a buyer now of cyclical stocks like those mentioned above on dips and down days. And I also think there is a lot of value in shares such as iron ore pellet producer Ferrexpo, mega-miner Rio Tinto, and housebuilder Persimmon. I’d be keen to own shares in all those firms too, along with a fund tracking the FTSE 100.
