Deutsche Bank downgrades European banks, upgrades energy

Deutsche Bank downgraded its stance on European banks on Tuesday in its latest equity strategy note, as it upgraded the energy sector.

Banks were cut to 'underweight' from 'benchmark', with DB saying fading Eurozone growth momentum is likely to weigh on the sector over the coming months. It noted the Eurozone composite PMI new orders index at 55.5 is consistent with 3% GDP growth for the bloc, which is significantly above its economists’ GDP forecast of 1.8%.

"If PMIs fade back to the levels consistent with our economists’ projections (at around 53), this would imply PMI momentum (i.e. the six-month change in PMIs) turning negative over the coming months," it said, adding that banks are among the sectors most sensitive to swings in Eurozone PMI momentum and tend to underperform when it turns negative.

In addition, it argued that there is little valuation support, with the sector’s price-to-earnings discount at 20%, roughly in line with the long-term average.

"We expect PMI momentum to trough later in the year, at which point we will be looking to turn more positive on banks, especially given that our sector analysts see upside for the sector over the next 12 months (as a function of the expected interest rate normalisation)."

Deutsche went the other way on energy, bumping the sector up to 'overweight' from 'underweight', noting it is the worst-performing sector so far this year, having underperformed the market by 12% year-to-date.

"Following the recent correction, energy is around 5% cheap on our short-term fair-value model based on oil and sterling (the largest upside in four years). It also ranks as the cheapest sector on our European sector valuation scorecard. The relationship between the oil price and the USD points to near-term upside for oil, given the recent USD weakness. Lastly, oil speculative positions have fallen sharply from a six-year peak in February, pointing to a more balanced market sentiment."

The bank upgraded construction materials to 'overweight' from 'underweight' following a 9% underperformance of the market since early December. It downgraded the technology sector and airlines to 'benchmark' from 'overweight' following recent strength, and cut consumer durables, i.e. luxury goods, to 'underweight' from 'benchmark' saying they are not yet priced for fading global macro momentum.

Finally, DB reduced its 'underweight' in the mining sector following the recent correction.