BofA Global Research (European Equity Strategy)| We remain positioned for a macro recovery: the market is caught between improving economic data, on the one hand, and rising US COVID-19 cases, on the other. We think there is a strong case to stay positioned for a continued macro rebound, given that: (a) economic activity remains depressed and has a lot of scope to recover as restrictions are removed; (b) the more virus cases rise in the US, the stronger the incentive for state governments to make use of tools that have proven to be effective elsewhere (such as mandatory mask wearing, curbs on mass gatherings and intensive testing); and (c) even if the US suffers a setback, the European recovery is proceeding more smoothly. As a consequence, we expect the Euro area PMI to rise to 53 in August and 58 in September, in line with levels reached in past recoveries.
We stay overweight France, Spain and Italy: France is a cyclical, domestic index whose relative price index moves in line with the European equity market. We see 15% further upside for the Stoxx 600 by November, which, in combination with the rise in Bund yields we expect (as PMIs recover), implies 6% upside for France’s price relative by late Q4. Spain and Italy should benefit from high weightings of banks, which we expect to rebound on the back of improving growth momentum. Our projections for higher Bund yields and lower macro uncertainty (both positive for banks) should help Spain and Italy to outperform by 13% and 6%, respectively, by Q4.
We remain marketweight Germany and lift the UK from underweight to marketweight: After 12% outperformance since March, Germany’s price relative is already priced for a Euro area PMI at 56 and, hence, for much of the good news we think is likely to materialise. UK’s relative price index has meaningfully undershot its macro-implied fair-value in a way that further downside looks limited. Hence, we lift the UK from underweight to marketweight.
We are underweight Switzerland on expectations of higher US bond yields: Swiss equities tend to underperform in periods of rising US bond yields, given their large weighting of defensive bond proxy sectors like pharma, our key sector underweight. We expect US bond yields to rise in response to a rebound in global growth momentum, which should weigh on Swiss equities over the coming months. Our macro projections imply 8% underperformance for Swiss equities by late Q4.