Rising bond yields and a sharp improvement in earnings momentum for banks and energy should prove fertile conditions for European value stocks to continue outperforming growth, according to BofA Securities.
Helped by a 15 basis points rise in the US 10-year bond yield, value stocks in Europe have outperformed growth companies by 15% since early November.
Based on the expectation of further upside in bond yields in response to a sharp acceleration in global growth, rising inflation and reduced monetary policy accommodation; BofA Securities says the value rally has further to go.
“Together with our projections of a euro area PMI rebound and additional oil price upside (as a function of improving growth conditions and continued dollar weakness), this implies further 15% outperformance for value versos growth stocks by Q3,” said Sebastian Raedler, an investment strategist at BofA Securities.
10-20% outperformance
Raedler noted the value sectors, airlines (42% outperformance versus the market), energy (32%), banks (27%) and insurance (13%) have been among the strongest performers over the past four months.
“We remain overweight all four sectors, with our macro projections implying 20%+ further outperformance for banks and airlines and 10% for energy and insurance,” he added.
“We also expect further 10% upside for European equities, 15% outperformance for cyclicals versus defensive, 10% outperformance for capital goods and luxury goods, as well as a further 10% underperformance for pharma and utilities.”
With growth in Europe predicted to accelerate sharply into mid-year, BofA Securities announced last month that it had raised its view on European equities from neutral to positive.
Meanwhile looking more globally, recent research from Natixis Investment Managers revealed that some 63% of global fund selectors anticipate that value will outperform growth in 2021.
