SocGen reiterates positive stance on European equities

Societe Generale reiterated its positive stance on European equities for 2016 as it pointed out that fears over China are not new.

Between August and September of last year, the Eurostoxx 50 slid 18% before rebounding sharply, rising 16%.

SocGen said that once again, the market will probably force Chinese policymakers to ease more at a time when inflation and shadow banking are under control.

“Despite the recent drop in Chinese equities, our Asian equity strategist thinks that it is too early to neutralise SG’s negative stance,” said the bank.

It expects Eurozone equities to be supported by further earnings growth. In particular, it reckons the Eurostoxx 50 will be supported by a continued Eurozone recovery and a weak euro, and thus by better earnings momentum.

Consensus expectations are for earnings to grow by 7% this year.

The bank is ‘underweight’ Germany’s DAX, whose heavy weighting in industrials and autos makes it highly sensitive to Chinese news flow.

It expects the DAX to continue to underperform in 2016, exacerbated by the Chinese story, due to its high valuation and political headwinds.

SocGen prefers France’s CAC 40 and Italy’s FTSE MIB, where growth momentum is expected to continue to improve over the next two years.

In terms of sectors, the bank is ‘neutral’ autos and basic resources, both of which are expected to suffer in the short-term due to China woes.

To protect portfolios from current volatility, it recommends pharmaceuticals and tobacco, both at ‘overweight’, saying they are high-yield defensive sectors with low exposure to China.

Finally, to protect equity portfolios amid high volatility and fears over China, SocGen recommends going long European companies with low exposure to emerging markets and short those with high exposure.

Chinese stocks tanked this week, twice triggering the market’s now-suspended circuit breakers, dragging global markets down with them.