November 14, 2018

Overweight Financials (35%), Utilities (40%), and Industrials (25%): Underweight Pharma, IT, Durables and Real Estate (25% each)

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In Short

Global risk sentiment has become more fragile amid global trade tensions, soaring US yields and Italian budget uncertainties, with equities suffering a sharp setback in early October.
Overweight Financials (35%), Utilities (40%), and Industrials (25%): Underweight Pharma, IT, Durables and Real Estate (25% each)
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Highlights:

  • Global risk sentiment has become more fragile amid global trade tensions, soaring US yields and Italian budget uncertainties, with equities suffering a sharp setback in early October.
  • A still solid macro backdrop, decent earnings and valuation will help to contain recent pressures on equities, in the short term. We see some signs of overshooting in risk-off correction.
  • Valuation of most risk-exposed equity assets has particularly suffered and show quite subdued market-multiples levels: Italy, Japan, EMs, EU Auto sector and EU Banks (Italian ones in particular).conservative party.
  • The 3-month change of the equity risk premium in the euro area (EA) has soared to reach levels which are the highest in two years, albeit still below 2016 peaks. The MSCI EMU PE is also on the cheap side relative to macro surprises indicator for the EA.
  • In this respect we want to suggest betting on a possible stabilization of the market momentum, and on cheaper EU sectors, with a bias on Value and financials versus more expensive and Growth ones. As we want to maintain a cautious approach, we consider the sector with higher scores as derived from lower composite valuation, lower beta and lower relative performance so far achieved (6m and year-to-date, a proxy for positioning). Lastly, we take into account our sector regression models which use macro variables as input.
  • Overall, we suggest go long on EU Financials, Utilities and Industrials versus Pharma, IT, Durables and Real estate, targeting an overperformance of around 7% over the next 12 months. Utilities represent a hedge to protect us from the riskier financials and industrials.

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