Societe Generale recommends switching equity allocation to Eurozone from US
Societe Generale has recommended taking advantage of the Eurozone recovery, advising clients switch out of US equities and into Eurozone equities, where tailwinds are increasing.
“The euro area is finally showing green shoots of recovery. The mix of a weaker euro, lower oil prices, lower rates, the European Central Bank’s quantitative easing and the Junker investment plan should all bear fruit and boost Eurozone earnings and profitability,” said the French investment bank.
Against this backdrop, Societe Generale made five key calls to clients.
1) To take advantage of the euro area recovery as the bank revised up its 2015 GDP growth forecast for the euro area to 1.4% from 0.9% estimated in December 2014. “The weaker euro and the lower oil price should bear fruit. ECB quantitative easing would also support banking credit,” said SocGen.
2) To get ready for a new rate hike cycle in the US as the Federal Reserve will hike rates in 2015 for the first time in a decade. “A new tightening cycle in the US would push US bond yields higher (not good for growth stocks) and be a burden for illiquid assets such as small caps,” it added.
3) To protect your portfolio ahead of the UK election on 7 May “given the uncertainty of the election results,” said SocGen. It r recommends staying away from the UK equity market. “We only find value in USD-sensitive UK stocks which could benefit from the weakening GBP/USD."
4) To favour reforming countries over countries with strong GDP growth expectations as Soc Gen already expects Germany and Spain to generate GDP growth of 2% in 2015. “The DAX index seems to be tired according to our equity chartist, while the IBEX 35 would suffer from weaker newsflow from Latin America (which is sensitive to commodity price). The CAC40 and the FTSE MIB could benefit from accelerating reforms in the respective countries,” said the bank.
5) To hedge your portfolio toward lower oil prices as the fundamentals remain weak on the oil price front and the risk of a further drop is high in the medium term. “We recommend hedging portfolios against lower oil prices and investing in companies that would benefit from those prices,” added SocGen.