BofAML: Más como 1998 que como 2008 (European Equity Strategy)

Redacción - Viernes, 22 de Enero

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European Equity Strategy: Benchmarking the bear: more 1998 than 2008 • EU equities oversold (high cash levels and AAII net bulls at 3rd %ile).• Market shock (1998) not crisis (2008). Large EPS recession less likely than prior bear markets and systemic risks lower. • Triggers? Stabilizing growth data, easier CB policy, stable oil. O/W yield, DM>EM, select cyclicality and Health > Staples.

EU equities in bear market territory & heavily oversold

The 21% sell-off in European equities has taken us into bear market territory. Technical and sentiment metrics have moved decisively to oversold levels. 6-month returns are 5^th percentile and AAII sentiment survey is 3^rd percentile since 1987. Cash levels are high.

Market shock not recession, more 1998 than 2008

Despite a large market decline in 1998 recession in DM economies and earnings was avoided and they grew strongly again in 1999. Although EM is larger today our economists argue the EM/commodity downturn is manageable for DM and do not expect a broader recession. Recent data is encouraging, with strong European PMIS but also signs of stabilisation in US manufacturing (Philly Fed, ISM new orders) and China (BofAML ACT growth tracker). Corporate and bank leverage is lower now than in 2008.

Benchmarking vs previous bear markets

Bigger bear markets than this one usually preceded large EPS recessions or started from more expensive valuations. Current multiples are above many prior troughs but we see lower EPS risk this time (strong EU data & ROE/EPS not stretched). In addition, with very low bond yields equity valuations look much more attractive on a relative basis. The DY to bund yield spread is 3.0% - above all prior market troughs bar March 2009.

Equities in buy territory - watch oil, US data & CB policy

We have stressed the need to be tactical as regulation and trading patterns drive less liquid markets that are more prone to large swings. With a constructive view on fundamentals we would add risk into current weakness. Stabilizing growth indicators, easier / less tight CB policy and beaten up technicals / sentiment are encouraging signs already, but equity and credit markets may need stability in oil markets to rally. The ECB today indicated more and expanded easing is likely in March, while the PBoC has achieved some stability in CNY. Stability in oil is key from here.

O/W yield, DM>EM, select cyclicality and Health > Staples

We advocate sustainable DY in Europe and a preference for DM over EM. That leads to OW in Tech, Media, Industrials and Banks and UW in Basic Resources, Autos & Staples. The escalation of NPL / capital concerns in Italy may represent a downside risk to our Banks OW, but we don't expect liquidity or sovereign strains. Both Health and Staples have performed defensively in the sell-off but we prefer the former on fundamentals.

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