Bank of America says time has come to sell pharma, staples, and autos
For the first time since the financial crisis the European economy appears to be on a sure-footing so the time has come to ‘rotate’ out of the most expensive defensives and the big winner of the recovery rally, automobiles, strategists at Bank of America-Merrill Lynch reiterated on 5 May.
Already two weeks ago they saw an opportunity to rotate into banks and oils, but on Tuesday they added shares of industrial sector companies to the list.
Banks are the cheap way to play the sustained European recovery, while oils are under-owned if the oil price has found a low. Industrials on the other hand have lagged due to worries over China and cuts to capital expenditure plans in the resource space.
“But we feel that is in the price now,” the analysts wrote in a research note e-mailed to clients.
To fund that move, they recommended selling (under-weighting) expensive defensives, such as pharmaceuticals and staples and the big winner of the recent equity rally in Europe, automobiles.
Yield is still a consideration for investors, but they prefer to look for that in utilities and telecoms.
As regards last week's volatility in financial markets they pointed out how, as always, it came from where it was least expected, the German Bund market and not Greece.
Nonetheless, they retain a constructive stance on European equities.
“As we believe low yields are here to stay, the ECB will not want the euro to strengthen unduly and the recovery seems to be gaining traction. All of that suggests that European equity markets will likely be moving higher over the medium term. So we view this correction as healthy and one we would look to buy into,” the broker added.