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Citi

Divergence in European Countries, Sectors and Companies

Citi’s Global Investment Committee has reduced allocation to European and emerging EMEA equities from neutral to underweight. Within the region, much performance dispersion is expected between countries, sectors and companies.

 

The Eurozone could see a contraction in GDP of 8.6% YoY in 2020. Tourism and trade representing larger shares of economic activity than the US, while limited monetary and fiscal response to COVID-19 so far is likely to result in fragile areas being exposed. However, there are likely to be substantial differences in outlooks across European nations.

 

Countries: Switzerland and the UK are preferred, while staying particularly cautious on the periphery nations and those most impacted by the COVID-19 lockdowns. Switzerland has high exposure to some preferred sectors, has seen the smallest earnings downgrades, with dividends looking the most sustainable. While UK dividends look vulnerable, the Bank of England’s and government’s monetary and fiscal responses respectively have so far been impressive.

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Sectors: At a sector level, Citi analysts’ preferences gravitate towards those that show greater resilience and have less exposure to the pandemic’s economic fallout. Preferred sectors are healthcare, information technology, communication services and consumer staples. Citi analysts are more cautious on energy due to falling oil prices and on financials due to dividend vulnerabilities and rising loan defaults.

 

Companies: Q1 earnings season could help to provide further clarity around the shutdown’s business impact and resulting dividend cuts. Markets have priced in cuts to European dividends of 46%, 48% and 33% in 2020-22 respectively, while only 15% of dividends have actually been cut in the EuroStoxx 50 (on a market-cap weighted basis), implying further cuts ahead. Given ongoing risks to dividends, Citi analysts increasingly shift their focus towards companies with stable balance sheets and strong cash metrics.

 

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