In its « Risk Reversal » Europe 2018 outlook report, Exane BNP Paribas recommends to keep a value bias and prefer Oil & Gas, Travel & Leisure, Healthcare, Telecoms, Banks and Insurance sectors.
« The drugs worked. Too well », warn strategists Ian Richards and Jeremy Gaudelier.
« QE was designed to head off post financial crisis de-leveraging and reduce the risk premium. Hat tip to the policymakers. But too long on the painkillers and you risk side effects. Incentives drive behaviour, and exceptionally cheap debt has driven a borrowing explosion in key areas of the global economy and pushed investors to lose valuation discipline.
Draining the swamp
When it comes to QE, flows dominate stock. And in this respect the delta is set to turn negative. This raises obvious questions over the sustainability of equity valuations, but more importantly, we see a strong chance of materially higher credit spreads in the US over the next 12-months. This raises the stakes, given a large tail of highly geared companies. And if the USD responds to higher rates there will be an added drag on global USD liquidity. EM suffers too in this environment.
Sectors – stay away from Cyclicals
Europe has not experienced the same increase in leverage, and the ECB is two steps behind the Fed. Nevertheless Europe is unlikely to shrug off the external issues. Financials are our beta pick on the domestic recovery. But beyond this, Cyclicals look like they have overreached this year. And given the macro context we position the portfolio autiously, with little EM exposure. We do all we can to emphasise Value over Growth, and make modest sectoral changes to reinforce these objectives.
We think, and hope, that the changing liquidity backdrop will force investors to re-appraise the appeal of bond proxies, and instead return to allocating equity capital according to more justifiable criteria. We highlight two capex-based strategies that offer compelling long term performance compared to shareholder distribution plays. At the country level, we still see juice in the French trade and buy Italy in the Periphery, despite the upcoming election. And we name our 10 large cap stock picks for 2018. »
The following tables concentrate their sector/picks views for next year.
This report is provided with an information purpose only. This is not an investment advice/recommandation to buy/sell any securities mentioned here.