Analysts at Bank of America reiterated their negative view on European equities, telling clients that macro uncertainty was on the rise and economic growth momentum set to weaken, but stayed ‘overweight’ on lenders’ and airline shares.
Their forecasts called for a drop in the pan-European Stoxx 600 to 420 by year-end, premised on a shift from a so-called ‘goldilocks’ scenario to an anti-goldilocks’ one characterised by slowing rate of economic expansion and rising government bond yields on the back of higher inflation.
Among the factors arguing for slower growth were energy shortages in China and Europe, BoA said, the crisis in Chinese real estate and China’s ongoing supply chain issues.
Another key concern now for the analysts was a “sharp” increase in economic policy uncertainty.
Europe was not alone when it came to higher macro uncertainty but it was the region where it was most notable.
Their gauge for uncertainty in Europe had already retraced a third of the decline from its 2020 peak, they said.
“We see scope for uncertainty in Europe to continue overshooting our projections, given increasing concerns around energy shortages and supply-chain disruptions, as well as the sharper-than-expected loss in Euro area growth momentum.
“We think global macro uncertainty is also set to increase further over the coming months, as the global macro cycle slows, with the fractious US fiscal debate, the debt woes in China’s property sector and renewed US-China trade talks potential additional catalysts.”
Rising uncertainty tended to drag more on those sectors most attuned to the economic cycle, such as autos, banks and airlines and most supportive for defensive areas of the market such as persona and household goods, utilities and pharma.
This time around however, BoA explained that while it had gone underweight autos, it remained overweight banks and airlines on expectations for higher bond yields and an easing in cross-border travel restrictions, respectively.
