A number of industrial stocks are still looking like good value, with UBS listing Aristocrat, Brambles, Crown, Oroca, Resmed, Sirtex, Treasury Wine and Vocus Communications as premium stocks.
Lower-rated industrials that still look attractive include Ansell, Computershare, Harvey Norman, Incitec Pivot and Qantas.
Many investors say they are taking profits from the now expensive Australian sharemarket and lifting their cash positions.The paper, by UBS strategist David Cassidy, pointed out that industrial stocks – which the paper defines as not including banks or other financial stocks – are quite expensive relative to history.
Currently, the industrials sector is trading just above 18 times forward earnings, well above the long-term level of around 16, Mr Cassidy said.
Nevertheless, the sector was still looking attractive compared to resources, banks and the real estate investment trust sector.
"Multi-year headwinds in resources and banks (over the past 12 months) have seemingly pushed more money into the industrials-ex-financials, where earnings trends are comparatively better," Mr Cassidy said.
He noted that the industrials sector makes up only 40 per cent of the Australian market, compared with 72 per cent of the global market.
"To some extent it seems a case of a large pool of money pushing into a comparatively limited part of the market given the headwinds in banking and resources – about 45 per cent of the Australian market."
But not all industrial stocks were being treated equally by the market, he said.
"From a style perspective, 'quality' or 'defensive growth' has been the style of stock most aggressively re-rated," Mr Cassidy said.
Falling discount rates – the rate at which banks can borrow money from central banks – may have fuelled this, he said.
"This appears to have benefited the higher price-earnings 'quality and longer duration' end of the industrials sector," he said.
Finally, the decline of the Australian dollar was having an impact.
The higher end of the industrials sector is "inherently long $US or other foreign currency earnings, suggesting this portion of the market has had a degree of earnings tailwind from the decline in the Australian dollar in recent years".
However, Mr Cassidy said investors should be wary of industrial stocks with a high price-to-earnings ratio.
"Even without a clear macro catalyst to shift these valuation trends, at a minimum we would be careful not to become overexposed to the high price-earnings end of the industrials given the risks starting to build in the price-earnings, if not yet the earnings, of many of these stocks."