Last month’s powerful rotation away from defensives into risk/ value/ cyclicals has shaken up sectors’ upside potentials quite substantially. Here is a summary view of where the upside potential by sector lies and a set of comments for the two extremes on this chart. Interestingly, and all importantly, the combined upside potential has not changed to c. 10% in spite of this very significant repositioning.

Best avoided

Chemicals remain unattractive not so much because they have outperformed but because the speciality part of it (say Givaudan) remains expensive, jointly with air gases, while the more commodity part is attractive but with risks of downgrades. Best avoided.

Households (including cosmetics) have been rotated away but their valuations remain ludicrously high.

Autos: the knee-jerk of last month has wiped out the modest upside potential. This is a sector which is far from reaching the end of its earnings downgrade process. Deep value in components has been played out. Best avoided.

Consumer durables (mostly Luxury) has recovered a limited upside potential thanks to Kering  and Swatch. The sector remains out of reach with uncertainty in Hong Kong becoming an essential risk. Caution needed.

Food Retail: the broken business model is indisputably trying hard to reinvent itself but there is no reason after the 8% gain over the last month to see this as a signal that Food Retail is on a winning formula. Caution needed.

Attractive

IT hardware: this is too small a sector to warrant a comment. Nokia and Ericsson are perennial laggards even when Huawei is less of a threat.

Building Materials: this sector has recovered substantially but retains a considerable upside due to its partial exposure to the US where the business is brisk and to its emerging market exposure which, by and large, offers growth that Europe cannot deliver. There is a big question mark in India though, where the local financial crisis is severely restricting credit.

Concessions (mostly motorways if one includes Vinci, Eiffage and Ferrovial ) have been lagging, partly helped by Atlantia’s fall on governance issues. They remain very attractive as long as cheap money does not herald a fully-fledged recession.

Telecoms are perennial buys. They did not suffer from Q4 18 market fears and avoided the summer 2019 bumps. The case for safer dividends is made stronger every year and is the key to the attractive upside.

Paper & Packaging’s rebound is far from enough to wipe out an upside potential, largely due to the new paradigm about the value of forest assets as carbon sinks.

The Banks’ 7% one-month rebound would look like a hope that the bulk of the bad news on the rate side is behind. Tough call as ever while the upside potential remains across the board (3/4trs of the 39 banks have an upside above 15%).