BofA stays 'overweight' value versus growth, spies upside potential
Strategists at Bank of America reiterated their 'overweight' stance on so-called 'value' stocks versus 'growth', telling clients that it was the best way to position for an economic recovery into 2021 with potential upside to be had in the group versus their base case.
Airlines, Energy, Banks and Insurance had been the strongest segments among value stocks, which in the aggregate had outperformed their growth peers by 10% since Pfizer announced preliminary efficacy readings for its Covid-19 vaccine candidate - even if from a more depressed starting point, Sebastian Readler wrote in a research note sent to clients.
That said, BofA's forecasts called for a recovery in the euro area Purchasing Managers Index from 49.0 in October to 56.0 by April, albeit with an intermediate dip to 46.0 in November.
Fading numbers of Covid-019 infections, the roll-out of vaccines and US fiscal stimulus were expected to be the main drivers of that improvement.
"This would be consistent with a further 3% outperformance for value versus growth stocks," BofA said.
And there was significant upside potential to be had.
"However, investors' increased confidence in a vaccine-induced return to normality next year could mean that the market looks through the near-term macro weakness and goes straight to pricing a complete recovery scenario in which the PMI rebounds to 60," BofA explained.
If that upside materialised, it would be consistent with an additional 8% outperformance by value relative to growth.
"This recovery upside scenario would be consistent with a further 8% outperformance for value versus growth," BofA strategist, Sebastian Raedler, said.
"With value versus growth stocks thus offering upside potential in our base-case scenario as well as exposure to the possibility of a faster-than-anticipated recovery, we remain overweight. The same logic keeps us overweight the individual value sectors banks, energy, airlines and insurance."
Nonetheless, Raedler stuck to his 'neutral' call for European stocks overall, having recently downgraded the lot from 'overweight' in the wake of their 40% rally since March.
Indeed, under their 'base case' assumptions, the Stoxx 600 had a "mere" 3% upside left to their April fair value estimate for the benchmark stockmarket gauge.
Also in their base case, they saw 10% near-term downside risk for cyclicals versus defensives, followed by zero further upside.
Gains in US Treasury bond yields also merited watching closely, he said.
"We are underweight European quality stocks relative to the market, with our expectations of rising US bond yields pointing to scope for further downside, following 3% underperformance over the past month."
Lastly, following 9% their 9% underperformance since late-October, Readler upgraded his view on personal & household goods from 'underweight' to 'marketweight', adding that he saw no further downside for the sector.