Deutsche Bank sees bond yields falling more, upgrades Food&Beverage, Utilities

Strategists at Deutsche Bank reshuffled their recommendations for various sectors on expectations that economic growth and bond yields were set to fall, while the drop in the pound had already pushed some sector valuations too far in their opinion.

Food & Beverage was upgraded to 'Overweight' from 'Benchmark' due to its 14% underperformance since its peak in July - the biggest drop in 16 years.

Nevertheless, that was unsurprising, Deutsche Bank argued, given how in the meantime global purchasing managers surveys had registered their strongest momentum in almost five years.

But things are about to change, with Deutsche Bank said, with global PMIs about to pull back from current levels.

Hence too, the drop in US bond yields is set to run further as skepticism grows around the US administration's fiscal agenda, they said, citing their US fixed income strategists.

"If global growth momentum softens and bond yields move lower, this is set to benefit food & beverages."

Deutsche Bank also upped its view on Utilities, from 'Underweight' to 'Benchmark'.

"Utilities are one of the few defensive sectors with high domestic exposure and, as a consequence, have been hurt by the rebound in Euro-area macro momentum. Euro-area PMIs have now overshot the level consistent with our economists’ GDP growth forecasts. If they re-couple with our economists’ projections, utilities should benefit," it said.

Valuations are also supportive for Utilities, with their relative price-to-earnings multiples still one standard deviation below the historical average, although the sector's business model does remain "fundamentally challenged and M&A appeared unlikely".

The broker also turned more constructive on European Food Retail, lifting its recommendation from 'Underweight' to 'Overweight'.

Given past weakness in the pound, industry expectations for UK food inflation were for a rise of over 10%.

Personal & Household Goods on the other hand was downgraded from 'Overweight' to 'Benchmark' given that weakness in the pound (30% of the names in the space are UK-listed) is already reflected in valuations and the boost from Kraft Heinz's take-over attempt for Unilever was now in the rear-view mirror.

European Capital Goods were also taken down a peg on expectations for Chinese producer prices to continue fading.

"A fade in China PPI would be a negative for capital goods. It is the most expensive sector on our European sector valuation scorecard – and the price relative is already at a 20-year high."