BofA Securities Adjusts European Equities Outlook

BofA Securities has modified its stance on European equities, downgrading German stocks to underweight and upgrading UK equities to marketweight.

This adjustment reflects nuanced views on the evolving macroeconomic environment, sector dynamics, and valuation considerations throughout the region.

Germany's Downgrade

The downgrade for Germany follows an overshoot in the recent market rally. German equities have outperformed their European peers by 12% since June, driven by strong performances in sectors like software, capital goods, and insurance.

However, BofA warns that this surge may be unsustainable, particularly given the market's sensitivity to global macro conditions. Analysts anticipate an 8% relative downside for German equities in the coming months, particularly as the sectors propelling the rally might not maintain their momentum amid tightening conditions.

UK Upgrade

In contrast, the UK has been upgraded from underweight to marketweight, reflecting a reassessment of previous underperformance. UK equities have lagged the broader European market by over 10% since late 2022, primarily due to weaknesses in the energy sector and a strong pound.

Recent improvements, including a rebound in energy and a shift towards defensive sectors, have positively impacted the outlook. Analysts foresee continued upside for UK domestically-focused companies, supported by fiscal easing and stronger domestic growth prospects. This shift indicates limited further downside for the FTSE 100, positioning UK equities for a stable performance amid cyclical challenges.

Other European Markets

BofA maintains a cautious stance on Italy and Spain, rating them as underweight due to their dependency on banks and value sectors, which are expected to underperform as bond yields decline. Despite France's recent underperformance, the rating remains marketweight, with analysts highlighting lingering political uncertainty.

This recap emphasizes BofA's strategic favoring of defensive over cyclical positions in light of an anticipated global slowdown and potential rise in risk premiums. While the UK stands to benefit from its defensive tilt, Germany's cyclical position poses risks under current macroeconomic conditions.