UBS: Outlook 2017: No More Excuses…
We believe 2017 is a window of opportunity, but a narrowing one: by 2018 we see the Eurozone slowing to 1.2% GDP growth and the UK 0.7%. We forecast 8% EPS growth in 2017 as 3 drags fade: commodities, zero inflation and EM.19.12.2016 | 10:59 Uhr
2017: A Window of Opportunity for European Equities…
We believe 2017 is a window of opportunity, but a narrowing one: by 2018 we see theEurozone slowing to 1.2% GDP growth and the UK 0.7%. We forecast 8% EPS growthin 2017 as 3 drags fade: commodities, zero inflation and EM. What evidence do wehave? A decent Q3 reporting season and revenue momentum has just turned positivefor the first time in 16 months – it leads sales growth by 6 months (Figure 1). We target 360 (Stoxx 600) end-2017 - combined with a 3.8% dividend yield: a c.10% totalreturn. We see less upside in the FTSE 100 and target 7,100 end-2017.
What do higher Bond yields mean for European Equities?
3 factors matter: why are yields rising, at what speed and from what level. So far, the move has been about inflation rather than real yields (Eurozone 5yr 5yr inflation swaps are up 30bps from lows) and equities are currently positively correlated to rising inflation (Figure 2).
Upside risks: fiscal, releveraging, re-rating. Downside risks: rising yields, politics
Upside risks: as monetary policy runs out of road, a switch to fiscal boost (Fiscal Fitness – Is Global Spending "Bulking Up"?), companies relever, equities re-rate to bond-like multiples, US investors come back. Downside risks: real yields rise sharply; the ECB tapers too early, capital concerns over Banks and a busy European political calendar.
Upgrade the Energy sector to Overweight - Downgrade Transport
We upgrade Energy to Overweight from Neutral as the oil price drag on EPS is turninginto a boost and the sector offers the highest dividend yield in Europe. While Energyhas outperformed the market YTD it has underperformed the Mining sector by over50% and earnings growth is yet to turn positive – something we believe will happensoon. Hence, we think there is plenty more upside from here. We downgrade Transportto Underweight as a supply-side shock to oil prices puts pressure on margins and EPSdowngrades are now on par with the sharpest since the data began.
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