Cyclicals to stay in the lead, but mind the Greenback, JP Morgan says

Strategists at JP Morgan made the case for being positioned in Cyclicals, contrary to what 'bears' were recommending given the late stage of the economic cycle, arguing that the Federal Reserve, the US central bank, was set to 'fall behind the curve'.

In a research note sent to clients, they said: "Notably, US inflation break-evens are moving higher again."

"[...] If the market starts to believe that Fed is becoming too dovish, the curve should steepen and 10 year yield should rise. This was typically a good backdrop for Cyclical sectors," they explained.

To boot, Cyclicals were discounting too negative a macroeconomic outlook, they argued, and in the wake of recent outflows, positioning was also "quite light" relative to Defensives.

Indeed, they were anticipating that many of the recent negatives for Cyclicals would revert in the back half of 2019, with growth in China bouncing, that in the Eurozone stabilising, the US resilient, trade uncertainty washing out and commodity prices gaining altitude.

"If this scenario comes to pass, then the Cyclicals P/E relative could rerate further. This was seen in '15-'16 episode, which we continue to believe has similarities to current backdrop," they explained.

Strategist Mislav Matejka and his team said they were especially positive on the likes of Miners, Construction Materials, Steel and Energy - all of which they had upgraded last December.

Regarding the US dollar, should the global growth stabilisation thesis gain credence, then "it should weaken from here", they pointed out, to the benefit - typically - of commodity prices.

"More broadly, we find Global Cyclical plays such as Semiconductors, Capital Goods and Autos to be attractive."