Risk of European Counter-Cyclical Underperformance in 2H2014

Last week, we noted the outperformance of European counter-cyclicals and the group's relationship to the German Bund (here).  A quick look at sector performance in Europe so far this year shows the top three market leaders have indeed been the counter-cyclicals (with the exception of the Consumer Staples sector):



The 1H surge in counter-cyclicals relative to the overall MSCI Europe index has been somewhat of a pattern over the last few years.  Each time, counter-cyclicals have outperformed for the first half of the year and then lagged for the second half.  So far this year, the gains have been a bit more muted:



Has enthusiasm for more these more defensive sectors waned somewhat in the face of extended valuations?







Though the familiar early outperformance of counter-cyclicals has been more restrained this year, we wouldn't bet on a rotation into European cyclicals quite yet.  Relative momentum in the cyclical groups continues to underwhelm and counter-cyclical performance is still stronger than cyclicals, overall: