House Oversight — Estate records
HOUSE_OVERSIGHT_014460
European Equity Strategy
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European Equity Strategy 2017 year ahead – Refining the reflation rotation 01 December 2016 Unauthorized redistribution of this report is prohibited. This report is intended for amanda.ens@baml.com Key takeaways • 2017 - Reflation, Reversal, Rotation, Relief or Revolt. EPS to turn +ve but politics to remain a valuation overhang in H1. • Defensive vs Cyclical rotation at extreme levels. More balanced approach needed but look for another leg to cyclical trades. • O/w Media as quality cyclical and Oil. Stay cautious on UK domestic (Retail, Travel). Health, Utilities over Food & Bev. 2017 – A year of cross currents, nimble investors required Recovery (positive but moderate in our view) and Rotation go hand in hand - we think that the pace of the rotation has to moderate. ECB reversal on QE is a risk and tapering because the ability or willingness to do QE fades would likely cause a setback. Investors will demand a premium for political risk until we get clarity on populist Revolt or policy Relief in France and elsewhere. Like 2016 investors will need to trade the ranges. High single digit upside - politics likely to weigh near term A valuation overhang remains in Europe vs other DM. We see a return to positive EPS growth (+7%) in Europe for the first time since 2014, driven by higher global GDP growth Resources recovery, capex discipline and FX. +7% growth implies less downgrades than usual (10% is the average). Base case upside in high single digits (c9% total return) but politics may mean market highs are more likely achieved in H2. Modestly higher yields and higher equities compatible Equities can continue to perform with rising rates – the key is that inflation breakevens are not falling. However, a more aggressive bond sell-off taking Treasury yields to 3% or higher would undermine EM, the growth outlook, peripheral spreads and risky assets. Reflation rotation stretched – refining our approach Rotation has been extreme (>6SD move in Def vs Cyclicals). Argues for a […]