Investing.com -- BofA Securities has adjusted its outlook for European equities, downgrading German stocks to "underweight" while lifting its stance on UK equities to "marketweight."
This shift reflects nuanced views on the evolving macroeconomic environment, sector dynamics, and valuation considerations across the region.
The downgrade for Germany follows what analysts at BofA describe as an "overshoot" in the market's recent rally.
German equities have outperformed their European counterparts by 12% since June, buoyed by strong performance in sectors such as software, capital goods, and insurance.
However, BofA warns that this surge leaves the market overextended, particularly given its sensitivity to global macroeconomic conditions.
With expectations of a global growth slowdown, German equities appear vulnerable to an 8% relative downside in the coming months.
Analysts are also cautious about the sectors driving the recent rally, as these may not sustain momentum under tightening conditions.
Conversely, the UK has been upgraded from "underweight" to "marketweight," marking a reassessment of its earlier underperformance. UK equities have lagged the broader European market by over 10% since late 2022, largely due to weakness in the energy sector and a strong pound.
However, recent factors, including the recovery in energy and a tilt toward defensive sectors within the UK index, have improved the outlook.
Additionally, analysts project continued upside for UK domestically focused companies, driven by fiscal easing and stronger domestic growth prospects. The shift implies limited further downside for the FTSE 100 and positions UK equities for stability against cyclical headwinds.
Elsewhere in Europe, BofA maintains a cautious view on other markets. Italy and Spain remain under "underweight" ratings, reflecting concerns over their heavy reliance on banks and value sectors, which are expected to underperform as bond yields decline and risk premiums widen.
For France, the stance remains "marketweight" despite recent underperformance, as analysts cite lingering political uncertainty as a key overhang.
This recalibration underscores BofA's broader strategy to favor defensive over cyclical positions, aligning with an anticipated global slowdown and a potential increase in risk premiums.
While the UK benefits from its defensive skew, Germany's cyclical tilt presents risks under current macroeconomic conditions.