Germany's DAX index reached an all-time high on Wednesday, drawing close to the symbolic threshold of 13,000 points. CIO continues to favor Eurozone equities relative to UK stocks. Within its Eurozone country allocation, CIO is overweight Germany.
The equity bull market continues to run. Germany's DAX 30 index rallied to an all-time high of 12,976 points on Wednesday morning, as investors' risk appetite remained firmly intact. On Thursday morning, the index stood at around 12,955 points; it is up more than 12 percent year to date. The German market - like that of neighboring Switzerland, which also hit fresh highs this week - has been buoyed by positive performance on Wall Street, investors' increasing perception that the European Central Bank (ECB) might tighten monetary policy slower than previously expected, and encouraging global economic data. Investors haven't been perturbed by political uncertainty in the wake of last month's Bundestag elections.
CIO continues to believe that global equities can tick higher, and is overweight Eurozone equities relative to UK ones in its global tactical asset allocation. An increasingly robust Eurozone economy should support the region's stock markets. "With the prospect of rising US interest rates and a winding down of the ECB's asset purchase program next year, we believe the potential for P/E expansion is limited," says CIO strategist Bert Jansen. "But exceedingly low interest rates in the Eurozone – we don’t expect an ECB rate hike until 2019 – should remain supportive of valuations and allow the market to grind higher, driven by rising EPS." Solid global economic growth should more than offset the headwind created by a stronger euro.
Within its Eurozone country allocation, CIO remains overweight Germany (it is underweight the Netherlands and Belgium, and neutral on France, Italy and Spain). "The German market’s cyclical sector bias benefits from a favorable global economic environment and solid domestic growth," says Jansen. "The negative forex impact of a strong euro is largely priced in: The German market’s 12-month-forward P/E stands at an 8 percent discount to MSCI EMU, which is below the 10-year average of 1 percent."
Sector-wise, CIO retains a cyclical bias within Eurozone equities. It is overweight energy, financials and telecoms, and underweight consumer staples, real estate and utilities.
For further information, please see the "UBS Equity Compass: A sturdy, aging bull". CIO's Eurozone stock selections can be found in the respective Equity Preferences List.