Global investment firm BlackRock has announced its preference for stocks from Europe’s finance, energy, health, and discretionary goods sectors, despite the outperformance of European risk assets, particularly equities, so far this year. BlackRock’s latest market comment highlights the strong data coming out of Europe and the US, which point to higher and longer rates than central banks have been indicating.
While European equities have been outperforming, this trend is set to end as the latest data pushes the European Central Bank (ECB) to raise interest rates and keep them higher for longer. Hence, BlackRock favors the yield generated by credit and government bonds on short maturities, signaling that it is underweight on European equities but with a preference for financials, energy, health care, and discretionary stocks.
BlackRock believes that the market’s outperformance of European equities will not last, citing stubborn wage inflation in Europe, especially in services, which makes the public sector more attractive for job seekers, creating fierce competition for private sector employers. The ECB will need to balance this against the need to tackle inflation, and BlackRock expects a monetary easing cycle to begin only in the second half of 2024.
According to BlackRock, the market is not yet pricing in the economic suffering to come in terms of equity valuations, which could become unattractive for international investors. Therefore, BlackRock is underweight in developed market equities, not just in Europe, but still prefers the financial sector, particularly in view of higher rates. It also favors energy, health, and discretionary goods in anticipation of a return of luxury goods on the Chinese market.
While BlackRock remains neutral on Swiss equities, whose listing is full of financial, healthcare, and consumer goods stocks, it is overweight in developed market equities, expecting earnings to recover after the recession is over. From BlackRock’s perspective, the return on equity investment will exceed that of bonds against an increase in bond yields due to the higher risk premium that investors will demand.
The market is now looking to Friday’s US jobs data for further guidance as the strength of the labor market remains a key factor in keeping inflation in the core services sector very high. However, BlackRock does not believe that the outperformance of European equities can last, because inflation remains stubborn and will push the ECB to raise rates more to cool it down. BlackRock continues to expect a recession once the high rates unfold their effects, and therefore, it prefers to focus on bonds with short maturities to generate yield.
In conclusion, BlackRock’s latest market comment suggests that while it is not bullish on European equities, it favors better credit yield and has a preference for stocks from Europe’s finance, energy, health, and discretionary goods sectors. The market is now pricing in higher and longer rates than central banks have been indicating, with fewer cuts expected in 2024. BlackRock believes that the return on equity investment will exceed that of bonds against an increase in bond yields due to the higher risk premium that investors will demand.
