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Economic analysis 24 Jan 2017

BBVA Global Markets Research publishes its strategic Equity Report 2017

The BBVA Global Markets Research team presented the conclusions of its 2017 strategic equity report. According to BBVA analysts, the positive cyclical momentum is set to continue, with the metal & mining, oil & gas, construction materials, healthcare and telecommunications sectors becoming the best performing industries in Europe. In Spain, the Real Estate sector is expected to be the most dynamic in 2017.

Ana Munera, Head of Equity and Global Strategy in Global Markets Research, and Pablo Zaragoza, Head of Macro and Sovereign Bonds Europe, shared their forecasts for the next months, based on a core macro-financial scenario with positive cyclical momentum and world growth above 3% in 2017, supported by the fiscal stimulus and a monetary policy that is focusing more on credit creation.

“However, it is important to underscore the economic and political paradigm shift,” says Ana Munera. This implies that we are in a transitional phase for several key debate elements: fiscal stimulus vs. monetary policy, new regulation vs. de-regulation and transition towards increased exchange rate volatility and a more normal interest rate scenario.

Ana Munera, Head of Equity and Global Strategy at BBVA Global Markets Research, presents the main conclusions of its 2017 strategic equity report.

Just as in any other previous transitional period, this means there is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the policy. In BBVA Global Markets Research’s opinion, this reality requires a stricter return/risk ratio analysis, and makes stock-picking a more attractive alternative.

The pickup in growth expected in developed markets in 2017 and 2018 as a result of this paradigm shift will contribute to close the growth gap between developed and emerging markets, resulting in more synchronized global growth.

In this respect, Spain will remain as one of the eurozone’s leading economies in terms of growth, with a growth rate for 2016 likely to reach 3.3%. Also, despite indications of a somewhat slower growth rate in 2017 for the Spanish economy, it will still remain well above the eurozone’s average – 1.6% and 1.5% in 2016 and 2016, according to analysts.

In this scenario, BBVA Global Markets Research forecasts the end of extremely accommodative stance of central banks and an uneven increase in profit ratios from now on, led by the U.S. All this entails a gradual adjustment of the global financial conditions in the US and a strong dollar.

With respect to the European Central Bank, BBVA experts don’t expect a drastic change in its monetary policy during 2017, which will remain marked by the accommodative tone. This forecast has been confirmed by the recent announcement of the extension of the asset purchase program, at least through December 2017, in combination with the reinforcement of the message that interest rates are going to remain low in general terms over an extended period of time.

Press conference of the European Central Bank, January 2017. - BCE

BBVA Global Markets Research keeps an underweight position in Government bonds, overweight selectively in lending and overweight in stock market indexes in the developed world and commodities. It also keeps a positive vision over real assets, mainly those with profitability and growth such as the real estate sector in Spain.

In opinion of BBVA analysts, interest rate risk is higher in the U.S., while European public debt will continue relying highly on the ECB’s asset purchase program extension announced in late 2016.

The risk of rate rises is higher in the United States than in Europe due to the ECB’s asset repurchase program

Regarding risk premiums, the 2017 scenario is conditioned by the different election processes in Europe. However, it is worth noting the limited impact that, so far, other similar events which took place in 2016 have had on the risk premiums of peripheral countries as a whole and Spain in particular. In fact, attitudes toward the Spanish bond have been clearly supportive, not only compared to Germany, but especially to its main peripheral partners. A less uncertain political scenario, a more favorable growth profile and the improving standing of its banking system are the elements behind these behaviors.

BBVA analysts maintain a positive outlook for stock indexes despite the more than evident late-cycle dynamics in the U.S.: the improvement in inflation expectations are positive for the valuation of stock indexes, while higher nominal interest rates are not necessarily negative; it all depends on the speed of the upwards cycle and, above all, on whether actual rates will or will not remain relatively anchored.

The assessments in the U.S. stock market are already highly adjusted, and in the very short term there could be tactical corrections. However, the strength of the cash flows and the impact of the business support measures that Trump is expected to announce once he steps into office increase the likelihood of a gradual transition towards a more positive scenario than the one we’re currently considering in our core scenario. But, for the time being, and until we have more details regarding these measures, we would rather keep a neutral position.

Still, BBVA Global Markets Research prefers to overweight Europe due to the higher margin for positive surprises in profits and the higher relative appeal of its valuations. European indexes in terms of valuation with respect to their book value are trading at a 13-year low, despite the improvement in cyclical conditions in Europe.

In terms of price-earnings ratio, while the S&P500 is trading at approximately 17.2 times the profits expected for the next 12 months, the Stoxx600 is trading at about 15 times, significantly below the high of 2015.

In BBVA Global Markets Research’s opinion, current levels of European stock exchanges are already discounting the political uncertainty surrounding upcoming electoral processes in Europe. Also, the euro’s exchange rate is highly competitive, and the ECB’s monetary policy is expected to remain accommodative, even if the ECB starts slowly reducing its liquidity injections in the second half of the year.

On a per-sector basis, in Europe, the metal and mining, oil & gas, construction materials, healthcare and telecommunications sectors are considered the most attractive by BBVA Global Markets Research for 2017. In Spain, BBVA Global Markets Research recommends to overweight the real estate sector.

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