The relentless ascent of the US dollar has sent shockwaves through European equities, signaling a period of significant impact and adjustment. Since September, the USD trade-weighted index has soared by 7%, propelling exchange rates close to parity levels. This surge in the greenback has sparked a remarkable outperformance of European equities over global equities by 3% post a tumultuous second half of the prior year.
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Software:
The software sector (ETR:) has emerged as a shining star, outstripping the wider market by an impressive 15% since September. This exceptional performance highlights a significant deviation from its projected trajectory in the USD-dominated environment. -
Pharmaceuticals:
In contrast, pharmaceutical companies, with a substantial 40% exposure to US sales, have struggled to maintain their historical sensitivity to the USD. The underperformance is likely attributed to unfavorable news affecting specific stocks within the sector. - Capital Goods:
Traditionally expected to struggle amid a strong USD, the capital goods sector has defied expectations. Surprisingly, this sector has exceeded the projected trajectory based on USD strength, buoyed by a robust performance of defense stocks amidst growing prospects of expanded European defense spending.
The repercussions of a robust dollar often manifest as negative global macroeconomic surprises, typically surfacing about two months following the currency’s surge. These setbacks stem from the stringent financial conditions accompanying a stronger dollar, eventually impacting macroeconomic indicators.
While maintaining a bearish outlook on European equities, BofA retains a tactical Overweight position on Europe compared to global equities. Projections point to potential downsides for the , envisioning a 9% decline to 470 by the second quarter of 2025. Nevertheless, a modest rise in Euro area PMIs could potentially fuel relative outperformance.
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Defensive Sectors:
Defensive sectors such as food and beverages, along with pharmaceuticals, are identified as strategic overweight positions. This positioning anticipates a reversal of underperformance once risk premia begin to expand in response to multi-decade lows. -
Underweight Positions:
Conversely, banking and capital goods are flagged as key cyclical underweights by BofA, apprehensive of downward pressures from a potential slump in bond yields amidst fading global macro surprises. - Sector Forecasts:
Anticipated lower bond yields could translate into a 20% surge for the real estate sector, juxtaposed with a projected 12% decline for European value stocks compared to growth stocks. The semiconductor sector remains in the Overweight category, with expectations of a rebound after last year’s underperformance relative to global growth trends. Similarly, luxury goods carry an Overweight status, with minimal price gains anticipated post a 15% surge since November.
In essence, the upheaval caused by the vigorous US dollar underscores the intricacies and interconnectedness of the global economy, prompting investors to navigate carefully through the resulting turbulence for strategic positioning and resilience.
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