Email of the day on rotation into cyclicals
Comment of the Day

February 05 2018

Commentary by Eoin Treacy

Email of the day on rotation into cyclicals

Thank you for another very helpful weekend broadcast. At this interesting moment in the markets, your insights are worth a great deal to me.    

I am fascinated by one thing in my own portfolio. Today is a good example. When just about everything is down 1 to 4 percent, my Copper ETF is up 2.3% and the Nickel ETF is up 3.4%. I have noticed this on other days recently. Do the algorithms see these as long-term hedges and buy accordingly?

Eoin Treacy's view

Thank you for sharing your observation. Rather than attribute this action specifically to algorithms lets think about what we should expect from the maturing phase of the interest rate cycle.

When interest rates are low, the kind of shares that do we are those that grow quickly because of access to cheap liquidity to fund expansion with. Capital intensive globally oriented businesses that depend on global growth tend to lag because growth is spotty and capital investment does not have the same bang when you have a mature business. However, when interest rates start to rise the odds swing in favour of big businesses with global scale because they leveraged to the uptick in synchronised growth while those depending on cheap liquidity suddenly find their costs are going up.

What I believe we are seeing is a significant rotation out of, primarily, technology shares which sport wide overextensions relative to their respective trend means and into relatively cheap cyclical sectors that generally play catch-up at this stage in the cycle. Industrials resources like copper, nickel and zinc or lead all fit into that category. So, do banks.

Gold is also a potential beneficiary of this rotation and, so far, its consolidation in the region of the upper side of an 18-month range has been relatively orderly. If it can sustain a move above $1350 the potential for a successful breakout will be significantly bolstered. 

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