Global financials are in a sweet spot thanks to a rising interest rates environment and a benign macroeconomic outlook. In particular, Asian regional financials and European financials look poised to perform well, said UBS Chief Investment Office (CIO).
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CIO is overweight Eurozone equities versus UK equities and is overweight Eurozone financials, energy and telecoms. CIO said the valuations of financials are attractive relative to non-financials and earnings momentum is positive, despite pressure on net interest income due to persistently low bond yields.
Eurozone economic growth has consistently surprised positively in the last six months. On Monday, the Eurozone manufacturing purchasing managers’ index hit its highest level in more than six years of 58.1, another sign of the robust Eurozone economic recovery. The European Central Bank (ECB) will meet this month, where CIO expects a decision to be made on its monetary policy path for next year.
"We expect the ECB to continue on its exit path from ultra-loose monetary policy by reducing monthly QE purchases in 1H18 from EUR 60 billion to EUR 40 billion," said Ricardo Garcia, CIO Head European Macroeconomics.
The impact of ECB tapering on Eurozone country indexes may vary if it were to lead to a widening of yield spreads between Bunds and, say, Italian or Spanish government bonds, said CIO. At a sector level, financials should benefit from a rise in bond yields and a steepening yield curve.
CIO is neutral on US stocks but within its sector allocation strategy, CIO holds a moderate overweight in US financials, expecting the sector to benefit from rising rates, good revenue growth and improvements in operating and capital efficiency.
"Despite underperformance of US Financials relative to the S&P 500 year to date, the solid backdrop as well as positive optionality around potential tax cuts should support outperformance over the 4Q2017-2018 period," said Bradley Ball, CIO Financials Equity Sector Strategist Americas.
Meanwhile in Asia, CIO likes regional banks for their attractive valuations and improving corporate outlook.
"Regional banks, to some degree, have been the laggards so far in this cycle. We see them as primed for earnings upgrades, following the earlier lead by IT and materials. Banks offer more mid-cyclical exposure and are moving increasingly into the sweet spot," said CIO analyst Hartmut Issel.
CIO said the slowdown in the formation of non-performing loans is key to the sector's outperformance ahead, and expects seven out of the 10 MSCI Asia ex-Japan countries to experience relief.
"We believe 2017 marks the peak of asset stress. This should be followed by an extended period of improvements, with commensurate earnings progression," said Issel.
In Asia, CIO is overweight China, Indonesia and Thailand, versus Taiwan, Malaysia, and the Philippines.