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Credit Suisse upgrades European Cyclicals to 'overweight'

By Alexander Bueso

Date: Friday 15 Mar 2019

Credit Suisse upgrades European Cyclicals to 'overweight'

(Sharecast News) - Credit Suisse raised its recommendation on shares of European cyclicals relative to defensives on Friday, from 'benchmark' to 'overweight', while lowering their view on defensives from 'benchmark' to 'underweight'.
In the view of the Swiss broker, the shift towards defensives had run too far, with the group now pricing-in a 2.0% yield on the benchmark 10-year US Treasury note, versus 2.60% at present and Credit Suisse's own forecast for a "small" rise.

As well, European Purchasing Managers Indices were set to move higher and, in the opinion of Andrew Garthwaite and his team, the peak in European growth pessimism was now past.

In parallel, China appeared to be on a more even keel and globally the ratio of new orders to inventories was at levels were it had troughed in the past.

All told, combined the above had left the relative valuations of the two sectors out of whack with their historical averages, Garthwaite said.

Cyclicals were now at a 20% discount to defensives in terms of their price-to-earnings multiples, which was about 8% below the norm.

And yet, 90% of the time, when PMIs rose, cyclicals outperformed. That was also the case 82% of the times that government bond yields rose, Credit Suisse said.

"Cyclical earnings revisions are at levels at which they normally trough," Garthwaite also pointed out.

In particular, he expressed a preference for "cheap cyclicals", which were facing only limited disruption, including auto components, airlines and concessionaries.

Sectors facing greater disruption - such as autos and banks - were okay too, he said, as long as they were "very cheap".

Garthwaite also saw risks of a stronger euro, leading him to prefer domestic cyclicals such as Zalando, CapGemini, Faurecia, Lufthansa, Prysmian, Smurfit Kappa, ABN, Caixabank and SAP.

On the flip side, Credit Suisse's strategy team reduced its 'overweights' on German real estate and big cap pharma, but reiterated its overweight on European small caps relative to large caps.



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