European banks cheap enough to absorb rate cuts - UBS
STOXX 600 up 0.7%
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EUROPEAN BANKS CHEAP ENOUGH TO ABSORB RATE CUTS - UBS
Which parts of the European equity market will benefit or suffer from impending rate cuts? This is the question on everyone's lips as the clock ticks down to the Fed's Wednesday meeting, with its first rate cut of this cycle should kick off the global easing cycle in earnest.
Banks are usually seen as potential losers when rates are slashed, but UBS still has an overweight rating on European banks.
"It's not that we think they drive market performance, it's just that we find it hard to put them as an underweight," said Gerry Fowler, head of European equity strategy at UBS.
Though share prices of European banks have outperformed the broader market this year - up 19.1% YTD versus an 8.1% rise in the STOXX 600 - valuations in the space continue to lag.
A basket of European bank stocks .SX7P is trading around 7.2 times its 12 month forward earnings, according to LSEG workspace. The broader STOXX 600 .STOXX is trading at around 13.5 on the same metric.
"We expect changes in volatility, particularly through the election but also while we have this growth uncertainty, will make banks performance variable, but they are still cheap enough to absorb the rate cutting we are expecting, particularly in Europe," said Fowler.
More broadly, the highest rate sensitivity in the equity market is likely to be seen in Scandinavia, the UK and Spain.
"The UK is the one we like to focus on the most including the banks, and in particular the UK consumer because there are just so many tailwinds," said Fowler.
These include tax cuts, rising real wages, and rising confidence. The UK housing market, now being supported by the government, is also an area sensitive to rate cuts, said Fowler.
"All of these things point to better growth and stronger consumptions and therefore a reasonably quick easing of conditions and potential growth response," he said.
(Lucy Raitano)
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EARLIER ON LIVE MARKETS:
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