With growth in Europe predicted to accelerate sharply mid-year, BofA Securities has raised its view on European equities from neutral to positive, according to the latest BofA Global Research report.
Given strong vaccine efficacy, improving vaccine supply and the likelihood of a strong US recovery, BofA Securities’ economists expect euro area GDP growth to rise to 5% in the second quarter of 2021 and 7% in the third quarter.
“With Europe’s lockdown-induced slowdown out of the way, the prospects of a sharp growth acceleration ahead and the cyclical support from a strong US recovery enhanced, we have increased our cyclical exposure,” said Sebastian Raedler, an investment strategist at BofA Securities
Luxury goods, construction materials and German equities
To do this, in addition to raising its view on European equities to positive BofA Securities has lifted its weighting to European cyclicals and European capital goods from marketweight to overweight.
“Our expectations of of a sharp euro area PMI rebound, further bond yield upside and continued US dollar appreciation imply 15%+ outperformance for cyclicals versus defensives by Q3,” said Raedler.
“We also remain overweight in those cyclical assets that have further scope to price in the recovery – namely luxury goods, construction materials and German equities – and we are positioned for a continued rise in bond yields.”
It’s all about protection levels
In the BofA Securities latest global fund manager survey, it was reported that while managers remain overweight in eurozone equities, the allocation did fall nine percentage points between January and February.
Addressing the risks, Raedler said: “Any signs that the existing vaccines do not confer protection against the new virus strains could dash hopes of a strong recovery, leading to an unwind of the recovery trade.
“In addition, our rates strategists see a rising likelihood of a bond market tantrum, which could lead to a temporary disruption of the risk-on sentiment via a disorderly rise in real bond yields.”
