NEW YORK (The Street) - Strategists are split over whether to play a cyclical or defensive stance in US equities amid mixed economic data, emerging market woes and the wind-back of stimulus support.
While many are underweight defensive sectors such as utilities, materials and consumer discretionary, market bears are still out in force.
"The economy is not looking as strong as many people think," James Investment Research's David James said in a phone interview. He noted regional Fed Reserve surveys showed negative orders for many areas and said analysis of building starts showed weather could not be entirely blamed for the slowdown.
As a result, the research director has been trimming exposure to homebuilding stocks and prefers those such as telco Vonage
(VG), Spartan Stores
(SPTN) and non-cyclical energy service providers.
Others are more optimistic. South Texas Money Management president Jim Kee expects economic growth to pick up through 2014, noting defensives have run strongly over the past few years. He prefers domestic-focused cyclicals ahead of those with global exposure given weakness in emerging markets.
"I'm concerned enough about China to give the nod to domestic cyclicals," Kee said in a phone interview. Key Chinese manufacturing data has showed a contraction in the first two months of the year while the renminbi recently dived on concerns around the nation's property market.
Kee likes the domestic industrial, health care and consumer discretionary sectors - noting consumer deleveraging is largely finished.
Macquarie Research head of global research John O'Connell is also bullish on the US outlook. He likes cyclicals such as Bank of America
(BAC - Get Report), FedEx
(DTV - Get Report) Home Depot
(HD - Get Report)
and Bank of NY Mellon
He favors diversified financials and capital goods at a sector level, noting that rising business investment is likely to boost economic growth.
Like Keen, O'Connell is selling defensive stocks with a high exposure to emerging markets. "The increase in earnings volatility for widely-held defensive names like Coca-Cola
(KO - Get Report), Nestle
and Procter & Gamble
(PG - Get Report)
is likely to lead to a de-rating," he told clients. "Luxury names like LVMH, Hermes
also face similar headwinds."
-- By Jane Searle in New York
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