Focus on cyclical sectors, the most sensitive to the economic situation, so as to ride the European recovery. This is the main advice of the investment houses for 2014. Instead, caution is advised on emerging markets, to which developed ones should be preferred, with an eye to Japan.
Red card therefore for public utility services which, according to UBS, will be exposed to the crossfire of a financial situation with interest rates on government bonds that are lower and therefore also less favorable to the defensive, and to a declining electricity demand also because exposed to the strong pressure of renewable sources.
Credit Suisse adds other risk factors: the still very high financial leverage in the sector, the lower attractiveness of dividends (since many groups will be forced to choose between high payouts and maintaining rating levels), a possible re-regulation and new taxation on various national markets.
“Investors would do well to underweight utilities and consumer sector stocks exposed to changes in interest rates,” notes Deutsche Asset & Wealth Management, targeting “cycle-sensitive sectors”: cyclical consumer staples, industrials and financial services.
What are the sectors to bet on? Technological, financial (investment banks more than credit institutes) and pharmaceuticals all agree: the first two also because they travel at rather low multiples, despite being generally defensive, healthcare is less indebted than TLC and utilities. As regards the choice of markets and indexes on which to bet, there is a shared idea that, overall, developed markets, including Europe, will be able to offer superior performances to those of emerging markets towards which a differentiation strategy is suggested.
“Confronted with the acceleration of growth in developed markets – explains UBS – we prefer countries driven by exports, such as Taiwan. We also like China, where recently announced reforms are likely to boost confidence and trigger a re-rating from depressed valuation levels. However, we would be more cautious in relation to countries with large deficits or a significant dependence on commodities”.
For Morgan Stanley, the overweight recommendation on developed markets should be confirmed, against an underweight for emerging markets: "If the relative performances and valuations of the former are becoming high enough, we believe it is too early for a rotation towards emerging markets". According to the broker, the sensitivity of earnings to modest growth, the strengthening of the dollar and the rising cost of capital underlie this judgment: Brazil, Turkey, South Africa, India and Indonesia are the countries to remain cautious about.
