You've probably seen it reported that star fund manager Neil Woodford has gone bullish on UK-facing cyclicals recently, even going so far as to sell defensive stalwart GlaxoSmithKline(LSE: GSK) to fund the move.
In another surprising manoeuvre (at least to me) he piled his fund into Lloyds Banking Group (LSE: LLOY) after shunning bank stocks for more than a decade.
Bullish on the UK economy
Neil Woodford is known for his caution and for getting the big calls correct so that the funds he manages avoid large drawdowns. So why is he buying an out-and-out cyclical firm with an undifferentiated commodity offering such as Lloyds? My guess is that he might be attempting a kind of medium-term trade and will likely dump the shares as soon as it looks like a cyclical down-leg is on the way.
But he must be bullish on the UK economy to make this trade. US contrarian investing champion David Dreman once said that banks tend to be first in and first out of recessions and downturns, so I'd like to think that Mr Woodford thinks the UK economy is heading for a period of strong positive momentum.
Downturns can strike with alarming speed
I'm not swayed though. To me, there's big risk involved in holding the shares of a bank such as Lloyds, particularly after a period of robust profits such as it is seeing now. Profits are locked together with the fortunes of the UK economy, so if the economy dips, so will Lloyds' profits and the share price, and such movements can go a long way.
I reckon that the longer its profits are strong, the closer the firm could be to the next downturn, and history shows that such events can strike with alarming speed. Lloyds looks risky to me right now, so if I held the firm's shares I'd ditch them to buy something less cyclical.
Top of my list of candidates is mid-cap defensive consumer goods specialist PZ Cussons(LSE: PZC). Fast-moving consumer goods firms are renowned for their defensive qualities because customer brand loyalty and repeat purchasing tend to lead to a stable incoming flow of cash that is often remarkably resilient to the effects of macroeconomic slow-downs.
Downturn-resistant incoming cash flow
The reason for such resilience, of course, is that such firms tend to deal in goods that many people consider 'essential', which means they keep buying no matter how tough economic times become. PZ Cussons range of personal and home care brands includes names such as Carex, Imperial Leather, Zip and Morning Fresh, for example, all good sellers that people get in the habit of buying.
I think it is interesting right now because it appears to be poised to move out of a long period where operational and share price progress has been flat. Both the shares and the firm's revenue have been moving in a tight range since the end of 2010, but I reckon value is building in the business.
Last week the directors told us in an update that the strength and agility of the company's brand portfolio are underpinning solid performance in all regions and new product launches are performing well. I think it is just a question of time before operational progress and the shares break out to the upside.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of PZ Cussons. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.