UBS upbeat on prospects for European equities, reviews strategy

UBS reviewed its European equity strategy, sounding an upbeat note about the prospects for 2016 and 2017.

The bank said that after five years in a row of zero earnings growth investors are giving up on the European profit cycle.

However, UBS thinks underlying earnings have already turned and that 2016 and 2017 will see robust earnings growth of 13% - double consensus – and 8%, driven by higher nominal Eurozone GDP, improving margins and high operational leverage.

UBS said downside risks include a US recession and a dramatic deterioration in China/emerging markets.

“Although the market is not currently focusing on them (and therefore may be more interesting) there are also upside risks: a positive surprise to Eurozone GDP, structural reform in Europe and a pick-up in corporate activity (M&A and re-leveraging),” it said.

UBS upgraded the construction sector to ‘overweight’ from ‘neutral’ saying it should benefit from a pick-up in economic growth and is the second-most operationally geared sector. It noted a preference for CRH and HeidelbergCement.

In addition, it raised its stance on autos to ‘neutral’ from ‘underweight’, saying the sector no longer looks expensive on its mid-cycle analysis, while intentions to buy a car in Europe are close to decade highs. The bank highlighted Renault, Valeo and Continental.

Finally, it downgraded tobacco to ‘underweight’ from ‘neutral’ saying the sector does not fit its macro outlook as it tends to underperform in periods of economic recovery.

UBS has a 435 target on the Stoxx 600 for end-2016, which suggests upside of around 15% from current levels.