Gavekal Capital: Simple Explanation For Counter-Cyliclal Outperformance

Wednesday, April 23, 2014

Simple Explanation For Counter-Cyliclal Outperformance

For the last few years, the relative performance of counter-cyclicals compared to cyclicals has turned on the movement of 30-year TIPS yields.  In our counter-cyclical basket are the consumer staple, health care, telecom and utility sectors.  In our cyclical basket are the consumer discretionary, financial, industrial, material, energy and technology sectors.  When the taper talk began in the spring of 2013, real yields (TIPS yields) began a steep increase.  In this backdrop, cyclicals outperformed.  But, that upward trend in real rates has reversed itself somewhat this year, and with it stock market leadership has reverted to counter-cyclicals. As 30-year TIPS yields have fallen by 45bps, counter-cyclicals have outperformed by some 4%.