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By Clayton Browne

A new report from Barclays says Euro defensives have run their course and cyclicals are coming to the fore as economic growth solidifies.

A July 8th report from Barclays Equity Research suggests a sea change is coming to European equity markets, and, moreover, the transition from defensive stocks to cyclical stocks is already underway. Barclays analysts Dennis Jose and colleagues argue that the rally in defensives has run its course, and that positive macroeconomic data going forward is setting the table for a rally in European cyclicals.

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They outline the basis for their beliefs in the overview of the report: "we think the data surprise index could start to edge up soon. Our economists forecast global growth to accelerate from 1.7% in Q1 to 4.1% in Q4 14, the sharpest pick-up in 3 years. Moreover, there seems to be a certain element of seasonality here - the economic data seem to bottom out in July and improve thereafter. If we are right, cyclicals should outperform."

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Global economic growth likely in 2H

Barclays' economists advance the argument that global economic growth in the second half of 2014 will be the strongest in the past three years. The firm's global GDP forecast anticipates 4% plus growth in the second half of the year, relative to 2.5% in the first half.

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Of note, Jose and colleagues project the economic recovery will be broad-based. They believe economic activity will pick up in both the U.S. and Europe, and China as well. Barclays' economists are projecting 7.4% growth for China in 2H, suggesting a growth rate of 8.5% in the last six months of the year.

Recommend miners and banks among European cyclicals

Jose et al argue investors can "find value in Miners and Banks." With that idea in mind, the analysts added added Rio Tinto plc (ADR) (NYSE:RIO) (LON:RIO) to their European Recommended portfolio. Related to this, they also reduced their overall weighting in defensives and took profits on their overweight in Utilities by exiting their natural gas positions.

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The analysts offer some insight into their preference for miners and banks among European cyclicals below. "The reason why we prefer the Banks and Materials (particularly the Miners) to Discretionary and Industrials within the cyclicals comes back to our preference for "value". The Discretionary and Industrials sectors are together trading near the peak multiples seen in the previous two cycles. Therefore they already looking to have somewhat priced in economic recovery. The financials and miners, on the other hand haven't (Figure 7). In fact, the gap in valuation to their cyclical brethren is near the widest levels seen since 1996."

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Disclosure: None.

Source: European Cyclicals Cheap As Equities Climb