Today in the podcast, we update our latest views on sectors and key takeaways from our October RBC analyst outlook survey.
urvey, taken in early October:
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Now, the details.
Let’s start with takeaway #1: Our analyst survey revealed positive tilts on performance, valuations and demand and some interesting shifts in performance outlook rankings at the tails.
y, conducted in early October:
Digging down a bit deeper into the results, two things jumped out.
First, there were a few changes in terms of where our analysts’ optimism on performance was highest compared to our August survey. As was the case in August, performance outlooks were more constructive than other sectors by a clear notch for Energy and Health Care. One thing that changed was that REITs joined the leadership circle, moving into 3rd place and coming in ahead of both Financials and Tech. Financials and Tech – which were among the top four in the August survey – still have constructive tilts in the performance outlook question, but optimism for both slipped a little driven by a downshift in views on P&C Insurance/Insurance Brokers and Payments, Processors & IT Services. Utilities’ optimism was on par with Tech in this edition of the survey as well, which was due to the slippage in Tech’s score as opposed to a change in view in Utilities.
Second, there was an interesting change in terms of where our analysts’ optimism was lowest compared to the August survey. In October, performance outlooks were least constructive for Consumer Staples and Consumer Discretionary. Meanwhile, the performance outlook for Communication Services, which had been in the most pessimistic camp in our August survey, improved to neutral.
There were a few moving parts to this shift in ranking. Our Auto & Auto Parts team shifted from neutral to bearish, which impacted the score of the Consumer Discretionary sector. With Communication Services, our analyst shifted his Cable and Media scores from bearish to neutral. This jumped out to us because in our August survey, our internet analyst lifted his view on Internet/Social Media & Search, another group within Communication Services, to neutral from very bearish. Overall, we’ve seen a reduction in pessimism among our analysts with coverage in the Communication Services sector over the past few months that has pulled this sector off the bottom of the pile in the performance outlook rankings.
Moving on to takeaway #2: Our analysts see the mid-term elections as a non-event for most industries, though a good showing for Republicans is seen as a better outcome for the areas where politics are relevant.
We have primarily thought of the mid terms as an event with broader stock market implications as opposed to a sector specific event and what we heard in our survey from our analysts generally supports that idea. Most of our analysts said that if the Republicans take back control of the House and/or Senate, that it would be a neutral event for their industries. Among those who said that the event would have positive or negative implications, all but one said that it would be bullish or very bullish. The sectors that would benefit most from a good Republican showing in the eyes of our analysts were Communication Services, Energy, and Industrials. Regulation was the key issue cited by our analysts.
To make sure we had a true understanding of the sector sensitivities around the event, we also asked our analysts whether Democrats keeping full control of Congress would be a positive or negative development for their sector. Again, most saw it as a non-event, but those who said it would be bearish outweighed those who said it would be bullish. Sectors in which our analysts were most likely to see this outcome as a bearish development were Communication Services, Consumer Discretionary, Energy, Financials, and Industrials.
Wrapping up with takeaway #3: On Monday, we downgraded Consumer Discretionary from Market Weight To Underweight, and upgrading Communication Services from Underweight to Market Weight.
Overall, our analysts’ latest sector views support our own, ongoing US Equity Strategy overweights on Energy, Financials, Health Care, and Technology and our underweight on Consumer Staples.
On our overweights, one key thing we’d emphasize is that our Health Care overweight is on a short leash. We’ve liked the sector as a tactical defensive trading opportunity given that its valuations looked reasonable vs. the S&P 500 while Utilities and Staples hit past peaks on our models over the summer. But it’s starting to look like the valuation opportunity in Health Care may also soon be exhausted.
As reporting season gets underway, Health Care has started to look even more expensive than Staples and Utilities on our model.
Our analysts’ views also support our decision to upgrade Communication Services from underweight to market weight and to downgrade Consumer Discretionary from market weight to underweight. Both are key components of the Growth trade and unlikely to start outperforming again until the Growth trade gets back on its feet. We don’t think that will happen in a sustainable way until after the broader US market moves into recovery mode, which we expect to be characterized by sluggish GDP (an environment in which Growth tends to outperform).
There were two things that prompted this swap. First, as discussed above, we’ve seen a clear improvement in our analysts’ views on the Communication Services sector over the past few months, and some slippage in our analysts’ views on Consumer Discretionary (which were already deeply negative to begin with). Second, valuations now look better for Communication Services (which looks cheap) than Consumer Discretionary (which merely looks neutral) on our model. Communication Services simply looks more intriguing to us at the moment between the two.
That’s all for now. Thanks for listening, and be sure to check out our sister podcast, RBC’s industries in motion, for thoughts on specific sectors from RBC’s team of industry analysts.
