We suspect 2009 will be ‘sideways and volatile’, not the
sort of conditions equity investors like, but it’s better than
straight down. We expect equities to hit fresh lows in 1Q
or 2Q, but to gain 70% from there to the end of 2010.
Western Europe
7 January 2009
Equity Strategy
Flat New Year
The US and Europe will be in recession for much of 2009. We
expect the European equity market to fall below 2003 lows sometime in 1Q
or 2Q09. Earnings will probably not bottom until mid-2010, and we do not
expect much multiple expansion until credit spreads and volatility fall.
Early cyclicals. Once past the trough, our forecasts suggest that equities
could rise by 70% in 18 months, so it is already appropriate to have some
early cyclical exposure (retail and media). We are already aware of problems
in some defensive sectors (food & beverage; personal & household goods)
and this may spread to other defensives as the year goes on.
Still underweight industrial cyclicals. Our other sector calls include
a high conviction underweight on chemicals, and an underweight on all other
industrial and commodity-related cyclicals, including oil & gas. We have a
technical upgrade on banks from underweight to neutral, but it has little
practical significance yet, and we maintain our neutral weight on insurance.
We keep an overweight rating on healthcare, telecom and utilities.
We think the dominant theme will be financial health, which
may lead to a return of balance sheet investing (asset based, not earnings
based). For every bankruptcy there is also a survivor that gains market share
and becomes more valuable. We also expect a pick up in M&A, driven by
industrial logic not financial engineering.
On a crude price to book basis, media looks attractive relative to its
own history, while industrials and chemicals both look expensive. Most of the
financials look attractive but are plagued by worries about asset quality.
Contents
Flat New Year 3
Market forecasts 15
Stance at a glance 16
Sector momentum map 17
Recommended sector portfolio 18
Sector matrix 20
US sector perspectives 22
Big sector summaries 24
Country summary 32
General strategy contacts 38