BofA – European Equity Strategy: 2024 country outlook: overweight Switzerland, underweight Italy and Spain
Key takeaways
- We are overweight Switzerland, as we expect the index to benefit from weakening growth, lower rates & widening credit spreads
- We are underweight Italy and Spain, projecting banks outperformance to reverse as the economy weakens and risk premia rise
- We are underweight France (given our view of Stoxx 600 and bond yield downside) and the UK (on energy underperformance)
We are overweight Switzerland given our expectation for slowing growth and lower bond yields: the defensive Swiss equity market has underperformed the broader European market by 6% since May, leaving its price relative at a five-year low. The main reason for the weakness is robust US macro data, which has led to risk premia compression and rising US bond yields, in turn translating into broad defensive weakness. Over the coming months, we expect US growth resilience to give way to a classical macro slowdown on the back of intensifying credit-cycle weakness, a roll-over in the US fiscal impulse and reduced support from order backlog liquidation. This points to widening risk premia and declining bond yields ahead, consistent with 8% outperformance for Swiss equities by mid-2024.
We are underweight Italy and Spain on the scope for banks underperformance: both countries are up around 15% relative to the market so far this year, helped by their high weighting of banks (which have had a stellar year). We expect European banks to turn from outperformer to underperformer in H1 next year, as the economy weakens, credit spreads widen and bond yields fade. This should feed through to weaker performance for Italian and Spanish equities, with our macro projections implying 6% and 7% underperformance by mid-2024, respectively.
Underweight UK, given our projection of energy underperformance: the UK has been the weakest major country performer this year, underperforming by 8% on the back of weakness in the energy sector (the most important sector in the UK index) as well as GBP strength. We see further energy weakness ahead, given scope for oil price declines on softening growth, with a projected 3% downside for UK’s price relative by end-2024.
We are underweight France, but marketweight Germany: as a cyclical, domestic index, France looks vulnerable if European equities and Bund yield decline, as we expect them to. France’s price relative has rolled over recently, but remains only 2% below its all-time high, with our macro projections implying 3% further underperformance by mid-2024, leaving us underweight. We are marketweight German equities, as our base-case projections point to more limited downside relative to other cyclical markets.
