Professional investors are “puzzled” by the drivers behind the relentless push higher in equity markets across Europe, says Bank of America, with most agreeing that the full drag from monetary tightening has not yet played out.
In its recent Global Research report, Bank of America said that although the full effects of monetary tightening are yet to take hold, the timing is tricky and positioning for this has been a “punishing experience”, according to clients.
Many were sceptical that AI will make much of a difference at the macro level over the coming 12 months, however, the Bank’s investment strategists said there is palpable concern among clients in the US, Canada and the Nordics that a European equity bubble is building.
Many clients see the path of least resistance for the equity risk premium as lower, especially given the promise of a structural boost to corporate profits from AI. Investment strategist Sebastian Raedler said many clients are concerned about the risk of an equity bubble because they fear not being in the market when a bubble builds up is seen as a career risk.
There was, however, notable interest in Europe as a ‘diversification play’, according to the Bank’s strategists, among those clients expecting the macro cycle to hold up, given that European equities have lagged the global rally, offer attractive valuations and might offer a good way to position for an upturn in China.
Bank of America said the most interesting sector discussion among clients was focused on a potential reversal in European staples versus capital goods once the macro cycle starts to weaken. There was also much debate on the disparity between strength in capital goods and construction versus the weakness in mining, as these sectors tend to respond to similar macro drivers such as China and manufacturing.
