European stocks have spent this week mirroring sector moves that prevailed at the start of 2017, as rising bond yields spur a win for cyclical shares over their defensive counterparts. Supported by global growth, the rotation will continue, Citigroup Inc. predicts.
Bond-proxy sectors such as utilities and real estate have slumped the most in the Stoxx Europe 600 Index in recent sessions, while banks, miners and carmakers have rallied. Citigroup’s equity strategists say a combination of “synchronized global growth” and low risk will prove supportive for cyclical, financial and commodity sectors in the region in 2018.
“Synchronized growth should continue to support risk-on leadership in 2018,” Citi strategists including Elise Badoy and Jonathan Stubbs wrote in a note.
Citi is among the most bullish on European equities in 2018, despite optimistic predictions falling short of reality in the past two years. In a section in Friday’s note titled “European Markets in 2018 = Up, Up, Up, Up, Up & Up,” the strategists list six expectations for the region: higher euro-area economic growth, a stronger euro, a rise in bond yields, wider credit spreads, increasing earnings and dividends, and higher share prices.
A rotation out of defensive shares and into those seen as benefiting in times of economic expansion took hold in the second half of 2016, strengthening in the aftermath of the U.S. election on reflation bets before wobbling later in 2017. For this year, Citi favors European equities over bonds, supporting exposure to stocks excluding the U.K., and expects earnings growth of 10 percent to 15 percent, despite “mild headwinds” from a stronger euro.
On the bank’s focus list are the following buy-rated stocks: Adecco Group AG, Royal Ahold Delhaize NV, ArcelorMittal, AstraZeneca Plc, Aviva Plc, BASF SE, British American Tobacco Plc, Credit Suisse Group AG, Eni SpA, Iberdrola SA, Inditex SA, KBC Group NV, Kering, Rio Tinto Group, Siemens AG, Standard Chartered Plc, Telefonica SA, Valeo SA and Volvo AB.