Buy ‘Cyclical’ Stocks as Worst Is Past, Goldman Says

(Bloomberg) -- Investors in European stocks should increasingly favor manufacturing, technology and other industries that rely on economic growth as the global recession eases, Goldman Sachs Group Inc. said.“Recent data makes us more confident the worst in the economic cycle is past, and we further move towards cyclicals from defensives,” a team of London-based strategists led by Peter Oppenheimer wrote in a report dated yesterday. “Our strategy is to trade the cycles as they emerge, but be nimble as we may need to make more frequent sector changes than typically following a trough.”

Goldman Sachs raised its recommendation on European industrial goods and services companies to “overweight,” matching its stance on oil and gas producers, carmakers and telecommunications providers. The brokerage also upgraded technology and travel shares to “neutral.”The MSCI World Index has risen 22 percent since March 9 on speculation governments’ actions to support banks and stimulate growth will help pull the global economy out of its first recession since World War II. U.S. durable-goods orders and home sales and Chinese manufacturing data have fueled optimism over the past month that the economic slump may be abating.

Strategists at Odds
Strategists are at odds over whether the low in March marked the bottom of Europe’s 21-month stocks rout. Morgan Stanley’s Teun Draaisma on April 6 advised investors to sell European equities, saying “the bear market is not over.” A day later, Mislav Matejka, JPMorgan Chase & Co.’s head of European equity strategy, said the rally will go on as investors buy before an expected rebound in earnings growth this year.
The Goldman Sachs team downgraded its recommendations on some industries that are less geared to economic growth. Drugmakers were cut to “neutral” and food and beverage producers were reduced to “underweight.”Since Europe’s Dow Jones Stoxx 600 Index reached a near seven-year high on June 1, 2007, a measure of food producers has dropped 35 percent. That compares with a 56 percent slump for the Stoxx Industrial Goods and Services Index.