Broker snap: Nomura goes defensive

7th Sep 2009 12:59

Nomura Securities is changing the emphasis of its portfolio strategy, moving away from the traditional cyclical groups such as basic industries, consumer cyclicals and capital goods towards some of the recent laggards, such as telecoms, healthcare and utilities.'The cyclicals now trade on large premium valuations compared with historical norms relative to the rest of the non-financials,' notes Nomura analyst Ian Scott, adding that 'there is little support for a secular re-rating of the cyclicals - their profitability levels, although improved, do not suggest a re-rating.'According to Nomura's thinking the cyclicals require a 42% upgrade relative to other non-financial stocks to bring them back to normal levels. 'Comparisons based on dividend yield and EV [enterprise value] to capital employed also suggest that the cyclicals are pushing against the boundaries of the past 20 years of relative valuation,' Scott maintains.Nomura believes the telecoms, utilities, media and energy sectors look underpriced, especially in comparison with prevailing corporate bond yields. The broker specifically mentioned publisher Reed Elsevier and gas and electricity pipeline grid operator National Grid among its preferred UK stocks, while engineer Invensys and property firm Hammerson get the elbow.'Although many will view this sectoral shift as an overtly 'defensive' move, we point out that in the period after mid-1994, stocks continued to rally, while cyclicals underperformed,' the broker concludes.