GLOBAL EQUITY STRAGEY - Halving our overweight in autos
We halve the size of our overweight in European autos and add to banks. Why?
Halving our overweight in Autos: i) a period of Euro stability (although this should be temporary); ii) they are overbought; iii) sell-side is very optimistic; iv) autos have performed in line with HY spreads; iv) YoY car sales of 10% in Q1 are likely to slow modestly; v) there is an increasing risk from domestic Chinese brands to foreign competition (in Q1 foreign brands saw very substantial market share loss compared to domestic brands). These concerns particularly impact BMW (which our analysts are underweight- 30%-35% of profits come from China), but are also unhelpful for other German manufacturers;
Why still overweight: i) Car sales could be 20% higher given the rise in euro area consumer confidence (over a 2-year period, especially if auto financing follows the UK model); ii) valuations are reasonable for a sector that has improved RoE; iii) earnings revisions are good; iv) auto pricing on a CPI-basis is positive.
We still like the auto components: This remains a better structural story. On HOLT®, auto components are pricing in a c.30% decline in CFROI, and earnings revisions are strong.
Stocks: Our preference is for auto components (Valeo) and the more domestic auto names (i.e. French car manufacturers).
Why we increase our overweight in banks: Banks are the most domestic of the major cyclical sectors. The rise in euro area PMIs implies further outperformance; the cost of equity could be 8% implying the sector is discounting a mid-cycle RoE of 9% (against a current RoTE, adjusted for litigation and additional capital, of 9.4%, rising to 12% by 2017); Loan lead indicators imply a pick up in lending; we continue to prefer retail banks (Credit Agricole, Intesa Sanpaolo, Erste, ING, Banco Sabadell) over wholesale (Soc Gen) and investment banks.
We would remain overweight cyclicals: They should have performed better given where IFO is (and is expected to go); valuations are neutral and earnings revisions are attractive. Overall, equity sector risk appetite in Europe is still low.