Kames’ Goddin – why it’s time for investors to look at bargains in ‘cheap’ cyclicals

Cheap cyclicals around the globe which rely on underlying economic or macro factors to propel them suffered heavily in the recent correction, and are now one of the standout bargains in equity markets, Kames Capital’s Neil Goddin says.
At this stage in the market cycle much of the gains for stocks which fall into both the defensive or good quality cyclicals sectors have already been seen, amid a run to record highs for many equity indices.
While the sell-off has taken some froth out of markets, Goddin says the area which is now looking the most attractive is the deep cyclical stocks which rely on underlying economic growth to propel them. These typically excel versus the wider market in the final stages of a bull market.
Goddin, manager of the Kames Global Equity fund, says: “There are three possible scenarios from here. We carry on bubbling along with average but uninspiring GDP growth rates, we get a further sell-off, or markets move back towards highs we saw prior to the correction.
“We think the third scenario is the most likely now, especially given the recent adjustment to markets, and in that environment investors need to look for returns from companies which are more cyclical in nature.”
Goddin says he has recently been taking profits from higher quality cyclicals and moving it into cheaper cyclicals which have moved to bargain prices in the recent market volatility.
“These cheap cyclical names have seen a pull back and now they have the potential for a strong upswing from here as investors look for bargains in a world where there aren’t many left,” Goddin says.
Names Goddin is now adding to include LonKing, a Chinese construction business, Canfor (Canadian Lumber), and Nippon Light Metal.
“Given where we are now in the global cycle, some of these companies are starting to look attractive,” he says.
“Essentially the correct growth rates have not come through into share prices yet for some of these names. The challenge with such stocks is knowing how long to hold them, and certainly we wouldn’t call this a long-term trade, but these names represent some of the few remaining bargains out there after such a prolonged bull market.”
While the fund is looking more closely at cyclicals, it is avoiding the most defensive areas of the market, including the telecoms and utility sectors.
Goddin says: “We’ve moved out of some of the safe havens so we have a zero weighting in consumer staples, as well as utilities and telecoms.”
Looking ahead, Goddin adds the current market still has further to run, with valuations well short of true “bubble” levels seen in previous cycles such as the dot.com boom.
“Looking at valuations now globally, you could use the analogy of being in the 7th or 8th innings, but they are not on a par with eras such as the dot.com boom,” he says.