Gavekal Capital: Today's Economic Data Not Good For European Cyclicals

Monday, October 6, 2014

Today's Economic Data Not Good For European Cyclicals

We've  recently highlighted how European cyclical stocks are struggling (see Cyclicals Gone Bust, It's Been a Tough Year to Pick European Stocks and Getting Tougher in Asia , Beware European Cyclicals).  Today's economic data out of Europe gives us more to worry about when looking at European cyclicals.

First, the Sentix Economic Index, which measures the business climate in the Euro Area, continued its decline.  This economic barometer matches up pretty well with the relative performance of all cyclicals in Europe compared to the MSCI World Index.  Thus the drop in the Sentix validates the recent 10% relative underperformance of European cyclicals.  European cyclical relative performance is testing the lows made in July 2012.


Second, the European Retail PMI was released this morning, and it showed a similar plunge over the last few months.  Since a reading of 44.84 indicates a contraction in retail activity and consumer spending, it is no surprise that European early cyclicals (the consumer discretionary sector) have plunged lately, underperforming the MSCI World Index by 22% since early April.