Merrill Lynch upgrades Spectris and Spirax, prefers Smiths Group

While positive data indicators will tempt investors to continue to rotate away from quality defensives in favour of cyclical earnings growth, the sea change in sentiment towards China and and commodities "suggests investors should be wary of de-rating risk among cyclical names".

Merrill predicted the rotation towards cyclicals will continue for much 2017 as US indicators recover and Europe remains steady, though the major risk would be deteriorating Chinese data.

"The US looks the most cyclically depressed (industrially) of the major regions having been hit heavily by oil & gas declines. To us, this looks like the recovery story of 2017 and so we want to be long this theme, valuations permitting."

More generally, Merrill has turned cautious on players with sizeable mining exposure given current high expectations but was more constructive on the oil & gas outlook and sees value in diversified industrials and stocks offering thematic exposure or late-cycle growth.

Spectris was upgraded to 'buy' from 'underperform' on the potential for self-help, with a 2,600p target price, and Spirax was upped to the same rating from 'neutral' previously as it offers "quality and cyclical growth with lower relative valuation", with a target of 4,600p.

Smiths, a 'buy' with a 1,700p price target, is the preferred UK stock as new management adopt a proactive strategy

GKN, IMI, Melrose, Vesuvius and Weir are also all rated 'buy', with Morgan Advanced Materials, Rotork and Bodycote all held at 'underperform'.