Exane upgrades European Real Estate as reflation takes hold
When maximising one´s investment returns sector allocation is at least as important as stock-picking, analysts at Exane BNP Paribas found after analysing 10 years´ worth of data for the Stoxx 600.
That is particularly so for those investing in stocks with large market capitalisations, the broker added.
Real estate and Retail have a clear sensitivity to general inflation trends and should benefit from rising prices and wages, Exane explained in a strategy note e-mailed to clients on Tuesday.
The result of such a macro-driven or top down perspective yielded Real Estate and Food Retail as the best sectors to be 'long', it found.
Hence, the French broker upped its view on the former to outperform while reiterating its overweight stance on the latter.
That comes against a backdrop of improving labour markets and wage-led price reflation in the UK, Germany and the US. There is further to travel before one can make the same argument for the continent, "but at the least a normalisation of inflation as oil price swings was out seems reasonable", the broker reasoned.
Real estate stocks are often mistakenly seen as proxies for bonds, as they are rarely strongly correlated to government bond yields – although the past two years has been “an unusually long period ofsuch behaviour”, Exane admitted.
However, rising inflation expectations were pointing to increased rental income – i.e. pricing power – so this time around the swithc back to basics should be an “earnings positive”.
In the case of other sectors the key factor is industry specific dynamics.
So, from a so-called 'bottom-up' perspective the secular trends in pricing power favoured Resources over Automobiles, the analysts found.
Indeed, shares in each of those sectors were currently pricing in very different outcomes even if both industrial groups faced challenges.
On that basis, the analysts downgraded their view on Autos while keeping Resource stocks at outperform.
Autos had been quite a profitable play on weakness in the euro but the trend towards weakening pricing power in China would offset a positive outlook in the domestic market, Exane added.
In parallel, the trends in pricing within the telecommunications space were improving while among Utilities the opposite was true, the broker also said.