Bank of America Securities has said it remains negative on European equities, amid the rise of the new Omicron variant.
In its latest Global Research report, the multinational investment banking division of the Bank said its base-case macro projections of slowing growth and rising bond yields, driven by increasingly hawkish central banks, have forced it to take a negative stance on European equities.
According to investment strategist Sebastian Raedler, while a potential increase in Covid infections – the most likely scenario for Omicron being marked by ‘high transmissibility, little change in severity and a modest decline in vaccine efficacy’ – could weaken demand, it would also have negative supply-side implications which could keep inflation risks high at a time when central banks are already under pressure to respond to the recent spike in inflation levels.
Raedler said: “As a result, we still expect increasingly hawkish monetary policy, implying scope for higher real bond yields. However, there is a residual risk that growth concerns in this scenario trump inflation worries, leading to a delay in Fed tightening.
“Our base case macro projections of slowing growth and rising real bond yields leave us negative on European equities and underweight cyclicals versus defensives, with capital goods and autos our favourite cyclical underweights.”
The report said the additional growth worries resulting from the spread of the new Omicron variant had reinforced its stance, but noted that it increased the risk around its rates-sensitive recommendations, given the possibility of further Federal Reserve tightening.
