European equity investors should seek safety in defensive stocks ahead of a month of “monetary madness†according to an Equity Strategy research note from Deutsche Bank .
Monetary policy, a key driver of equity markets since the end of the financial crisis, is set to go into overdrive during December. The ECB is likely to announce further easing measures on December 3, November’s non-farm payrolls report (a key determinant of the Fed’s next policy steps) comes out on December 4 and the Fed is then likely to hike interest rates for the first time since 2006 on December 16.
European equity investors should adopt a defensive stance
Deutsche Bank believes that the ECB is now doing what it can to facilitate a December Fed lift-off and prevent the rate hike from having an adverse effect on European economies. Assuming that the Fed does indeed decide to increase in December, Deutsche Bank expects to see a 5% to 10% correction in global equity markets.
However, the bank’s economists expect the ECB to counter the Fed’s move with a six-month extension of its QE program as well as a 10bps cut to its policy rates. Analysts see a 10% upside for European equities by year-end 2016 as a result.
To play this trend, Deutsche Bank recommends that European equity investors take a defensive stance, buying health care, which looks well-placed to weather a Fed-induced market correction while avoiding telecoms, consumer staples and utilities. Assuming markets rally following the correction, Deutsche Bank likes banks and cyclicals, both of which the bank believes will outperform during the next 12 months.
On health care:
“Health care: we want to focus on sectors that are defensive, export-focused (to benefit from a weaker euro) and have significant US exposure (to benefit from a stronger dollar). Health care fits the bill: the sector ranks top on our European defensiveness scorecard (based on 10-year net income volatility, 10-year return volatility, beta with the equity market and correlation with economic lead indicators), derives 80% of sales from outside Continental Europe (compared to 55% for the market) and has 35% sales exposure to the US (compared to 15% for the market). On our valuation scorecard, health care is the best ranking defensive sector after utilities, relative EPS has continued to be revised up, our analysts highlight that concerns about patent expiries have abated and our US strategists point out that health care will benefit from ageing and increasing efforts to treat clinical conditions with drugs (see their report 2016 S&P EPS growth to surge to 5%, Nov 20).â€
