Underweight European Automobiles, BofA-Merrill says

Continued earnings growth would continue to drive a cyclical recovery in the wider market, but in the case of Automobiles investors would be best advised to find another ride to take them higher, strategists at Bank of America-Merrill Lynch said.

Indeed, the reflation trade was still alive and well, Tommy Ricketts, James Barty and Roman Carr said in a research note sent to clients, but consumer cyclicals specifically were vulnerable to either rising input costs or the dampening impact of higher inflation on consumer demand - and Automobiles to both.

In that regard, they pointed to the potential negative impact of the recent spike in energy prices on euro area margins in the back-half of 2017, an increasingly competitive Chinese market for German original equipment manufacturers, the cost of investing in 'Future cars' and the cost of meeting stringent emissions regulations, although the latter might soon change in the US.

Brexit posed a further potential stumbling block for the sector given news reports that it might be used as a 'bargaining chip' in negotiations.

Similarly, German OEM's in particular faced risks from the proposed Border Adjustment Tax in the States, BofA-Merrill said.

Nonetheless, with 86% of global purchasing managers' indices above the 50-point threshhold, the investment bank's forecasts were calling for 11% growth in European earnings per share.

Hence the strategists's decision to raise their 'Overweights' on Banks, Chemicals and Oils.

Banks, BofA-Merrill continued, were the most geared of any sector to improved macroeconomic conditions and a shift higher in interest rates around the world.

Automobiles (at Underweight) had a 1.8% weighting in BofA-Merrill's recommended European sector allocation, versus 15.9% for 'Overweight' rated Banks, 13.3% in Healthcare 7.1% for Chemicals, 6.7% in Oil&Gas and 4.8% in Utilities.

The investment bank's European Equity asset allocation also included a 12.0% weighting towards 'Neutral' rated industrial Goods and Services and a further 8.8% in Personal and Household Goods.