Merrill sees rally in European shares, cyclicals to outperform defensives
Bank of America Merrill Lynch said on Tuesday that European cyclicals should outperform defensive stocks, as it initiated coverage of the airline sector in its latest strategy note.
Air France-KLM
€9.93
16:40 23/04/24
FTSE 100
8,044.81
16:49 23/04/24
FTSE 350
4,424.29
16:59 23/04/24
FTSE All-Share
4,378.75
17:14 23/04/24
International Consolidated Airlines Group SA (CDI)
175.95p
16:40 23/04/24
Travel & Leisure
7,686.36
16:59 23/04/24
The bank said it expects the benchmark Stoxx 600 index to reach 415 by March, up from a level of around 392 currently, with cyclicals outperforming defensives by 5%.
Merrill said the airline sector was the largest ‘overweight’ in its European sector allocation as it’s priced for an outright euro area recession, which is unlikely.
"Our analysis suggests Euro area PMI momentum is set to turn positive again over the coming months, helped by a fading drag from credit conditions, an improving inventory cycle and a mildly positive tailwind from the fiscal impulse.
"Furthermore, we expect oil price momentum to improve only mildly over the coming months, boosted by the scope for near-term USD weakness."
It noted that the sector has outperformed by 10% since late August and said its macro projections imply 19% further upside for airlines' price relative by year-end.
"We also note that relative sector valuations look attractive, with airlines ranking as the second cheapest on our European sector valuation scorecard (behind only autos)."
Merrill initiated coverage of Air France and British Airways parent International Consolidated Airlines at ‘buy’. It also started budget airline Wizz Air with a ‘buy’ recommendation.
Bank of America is also ‘overweight’ banks, mining and energy, while its largest ‘underweights’ are European utilities, food & beverages and consumer durables.