More downside to Europe stocks, overweight FTSE 100 and Swiss equities, says Deutsche

Deutsche Bank sees another 7% downside to its near-term Stoxx 600 target of 295, the bank said on Wednesday, as it outlined its post Brexit trade recommendations.

Deutsche had said that in the event of a Leave vote, European equities would fall by 15%.

“So far, the Stoxx 600 index has corrected by 9%, but remains around 7% above our near-term Leave target of 295. Despite the market rebound on Tuesday, we remain cautious on the outlook for European equities, given that there is a risk that the political impasse will lead to broader financial contagion and given that the global macro picture continues to deteriorate.”

The bank recommended investors overweight pharmaceuticals, saying the sector’s defensive characteristics and its status as a beneficiary of dollar strength should allow it to perform well. It also pointed out that European pharma has tended to outperform during US presidential election years over the past two decades.

It also suggested going overweight the FTSE 100 and Swiss equities, which it reckoned should continue to outperform due to their defensive characteristics, with the FTSE being boosted by the additional GBP weakness projected by its FX strategists.

At the same, it recommended going underweight German equities as they usually underperform when macro momentum weakens and the equity market declines. Germany is one of the most cyclical markets in Europe, with an underweight in staples and energy and overweight in chemicals and autos.

DB remained cautious on banking stocks, noting the sector tends to underperform when macro uncertainty and credit spreads rise, while low bond yields are set to continue weighing on banks’ profitability.

In addition, it recommended going underweight mining stocks, with the sector set to be hit by weaker metals prices as the US dollar gains ground, and weaker expected Chinese macro momentum in the second half.

Deutsche Bank has a near-term target on sterling of $1.30 and sees the FTSE 100 trading at around 5,690 versus the close of 6,338 on Thursday, before the referendum results were announced.