Equity Strategy: How much more can Eurozone lag? Reiterate that commodity equities look better; Add to Real Estate

Speaker - Mislav Matejka, CFA, Head of Global Equity Strategy

After the strong 30%+ rally vs the US that started last September, Eurozone equities have lagged notably since May, by 14%. SX5E has not managed to make gains in absolute terms since February. On the positive side, given the poor relative run, Eurozone equities are looking quite cheap at present, and one could argue that the relative growth disappointments are likely closing in on their worst point, vs the US. Having said that, the absolute Growth-Policy tradeoff is still challenging for Eurozone, in our view. Activity has stalled, as we were fearing, and M1 lead indicator points to continued softness. On the other side, while ECB has indicated a pause, it might not be done, as inflation could stay sticky – core CPI still has a 5% handle. Eurozone EPS revisions held up well so far this year, but look set to turn sharply negative, which will take away some of the perceived valuation support. Finally, Euro equities are trading better than the macro outturns would suggest. We reiterate our downgrade to UW, made in May, staying cautious on the region, expecting it to have another leg of underperformance in the global context. This could come if services momentum slows more broadly, and if bond yields move down. Eurozone historically acted as a high beta on the way down vs other equity indices, especially the US. Within Europe, we have tactically a more positive call on commodity equities, Energy (OW), which tended to do well against the backdrop of the rollover in PMIs, as well as Mining, on which we were bearish earlier in the year, but would not be short any more given the big 30% underperformance since January. We are relatively more cautious on consumer and corporate plays, that have done well in 1H, such as Autos, Semis, Capital Goods and Luxury. We also stay cautious on Chemicals. We have been UW Real Estate for the last two years, but advise closing the short now. We are not excited about Eurozone Banks (N), and globally prefer Japanese Banks – we continue the pair trade of long Japanese vs Eurozone Banks – started in April, on the expectation of further move up in Japanese bond yields vs Eurozone bond yields.

This podcast was recorded on 18 September 2023.

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