The best and worst-performing sectors this summer

Chemicals firms did well, capital goods and food retailers look overbought, while banks underperformed.

This summer's best and worst-performing sectors have been revealed after a three-month period in which banking stocks lagged the UK market by 19%.

Morgan Stanley's quarterly summary shows that chemicals companies were the most successful, although the US bank notes that the sector now looks heavily overbought after outgunning the wider UK market by 19%.

Recent earnings upgrades justify some of this enthusiasm, but relative valuations for the sector are now at an all-time high across most metrics.

Capital goods is the second most overbought sector, having rebounded strongly in recent months. Again, Morgan Stanley thinks that this showing is in excess of the relative trends shown in earnings per share (EPS), with valuations at all-time highs.

In contrast, banking shares continue to set fresh lows after a period in which fears over Brexit, rising impairments and negative interest rates have sent investors running for cover.

If a pragmatic Brexit deal is reached, however, Morgan Stanley thinks that investors could see a 20-40% outperformance for banks. Its economists currently rate the probability of such a Brexit outcome at about 60%.

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As we reported from UBS earlier this week, an unusually large number of potentially material risks are making it hard to quantify a price at which stocks are attractive whatever happens.

This is despite hefty falls for shares in the sector in 2020, with Lloyds Banking Group (LSE:LLOY) currently trading at a lowly 0.5x tangible net asset value and Barclays (LSE:BARC) and NatWest (LSE:NWG) as low as 0.3x and 0.4x respectively.

Adequate capital positions mean UBS's Jason Napier still has ‘buy’ recommendations for Barclays, Lloyds, Paragon Banking Group (LSE:PAG), NatWest and Virgin Money (LSE:VMUK).

Among other sectors in today's report, Morgan Stanley said oil and gas looked to have been oversold in the three months. Despite this and upward earnings revisions in recent weeks, the bank still sees the sector as a value trap and rates the European sector as underweight.

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UK miners are performing broadly in line with relative earnings trends, with EPS and dividend per share revisions only bettered in construction materials.

The bank said:

“Despite their recent strong run, valuations for UK mining stocks look broadly neutral at this time and trade only modestly above long-run averages relative to the market.”

Food retail is another interesting sector after posting the second-best performance in the three months, making grocers the most overbought defensive sector on the UK market.

Relative valuations are at a 30-year high but earnings revisions have dipped into negative territory recently and are currently the second worst in the market.