Tuesday, January 18

Bond yields support European banks

Bank of America remains firm in its commitment to European banking. Despite the impact of the omicron variant, which could slow down the withdrawal of monetary stimulus and worsen macroeconomic forecasts, it continues to place the sector among its strategic bets within European equities.

The main reason given by the company for this commitment to European banking has to do with the rise in the profitability of the American debt.

“We remain overweight financials given our expectation of higher bond yields. The correlation of banks with the yield on US bonds has increased in recent years, as evidenced by the fact that the sector only joined the rally of recovery when the yield on US debt began to rise last September. ”Says a report by the US investment bank, published this week.

“As we think US bond yields will rise due to the Fed’s restrictive turn in response to inflationary pressures, we are overweight banks,” the document added.

Bank of America bets on underweight cyclicals

Beyond banking, Bank of America believes that the time has come to underweight cyclicals due to slower growth on the Old Continent.

“We expect 2022 to be a year of revenge, as growth slows to coincide with a withdrawal of monetary stimulus that leads to a rise in bond yields; as well as the PMI of the euro zone, a key catalyst for cyclical values, in negative territory throughout the year ”, says the document of the American firm.

In particular, cyclical stocks with growth profiles that have benefited from falling bond yields in the past are “particularly vulnerable”. Capital goods and the automotive industry are two of these sectors that they like the least.

Now is the time to move away from raw materials

They also do not believe that it is the best time to buy pharmaceutical stocks, also affected by the rise in debt profitability; and they believe that the time has come to move away from raw materials.

“We see room for the strengthening of the dollar to continue, helped by an increase in interest rates in the United States in relation to the rest of the world and also due to the increase in global uncertainty. We expect that a stronger dollar, combined with a softening of growth, will weigh negatively on commodities, leading us to underweight energy and reduce mining from neutral to underweight, ”the report said.

It touches to overweight the ‘utilities’, according to Bank of America

For its part, the investment bank has a temperate view of defensive stocks.

“Our baseline scenario of potential higher bond yields in the face of tighter policy by central banks makes it difficult for us to get too overweight in defensive stocks, as these typically perform well in periods of declining bond yields. “says the report.

On the other hand, the ‘utilities’ do seem attractive to them and, therefore, they are overweight

“Utilities are among our key bets, since they tend to do well when growth in the euro zone slows down,” the document said.

Bank of America also raises its advice on the defensive software sector to overweight, as it also benefits from more moderate growth and offers interesting entry points after recent declines.