LIVE MARKETS-Rates risks: caution on utilities and small caps
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RATES RISKS: CAUTION ON UTILITIES AND SMALL CAPS
Coming on the heels of a bond rout that drove Treasury yields US10YT=RR close to 5% last week, January's BofA fund manager survey has a disorderly rise in yields as the most bearish development for investors to watch this year.
Any more bond turmoil will likely reverberate across asset classes, from stocks to currencies. This risk is now heightened by Trump's return to office, which could focus attention on a reflationary policy agenda.
European stocks won't be spared either, but the impact will vary in intensity across sectors. Citi has looked in to it, examining how prior bond selloffs affected European equities.
Strategists at the U.S. bank note that cyclical European stocks perform well both in absolute and relative terms when yields increase due to stronger growth. However, rate rises linked to inflation are more problematic.
"High rates could still weigh on fundamentals of highly leveraged part of the market (SMID/infrastructure), via financing costs," they say in a note.
All in all, Citi targets a 10% upside for European stocks in 2025, even taking into account tarriff risks. It prefers beaten down cyclicals, but says bigger rates-related risks make it more cautious on utilities and small caps.
Below is a screen of stocks with negative free cash flows that face refinancing risks in a higher rates environment. Among the biggest firms on the list are utilities Iberdrola IBE.MC, National Grid NG.L, Endesa ELE.MC, Siemens Energy ENR1n.DE and Orsted ORSTED.CO.
“Reprinted with permission of Citi Research. Not to be reproduced.”
(Danilo Masoni)
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EARLIER ON LIVE MARKETS:
GOLDMAN SACHS VIEWS TRUMP'S INITIAL TARIFF RHETORIC AS RATHER GENTLE CLICK HERE
LUXURY BACK IN FASHION, WITH THREE FACTORS TO CONSIDER CLICK HERE
WELCOME TO TRUMP 2.0 - EUROPEAN AUTOS, RENEWABLES AND STEELMAKERS SLIDE CLICK HERE
BEFORE THE BELL: EUROPE HEADS SOUTH, WIND STOCKS EYED CLICK HERE
TRUMP'S BACK, SO IS VOLATILITY CLICK HERE
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