Bank of America analysts suggest favoring Value stocks over Growth stocks as Europe's economic recovery shows signs of volatility.
Despite a decline in the European Composite Macro Indicator (CMI) in August, BofA maintained in a note to clients Wednesday that the recovery phase remains intact unless a further decline confirms a phase change.
Analysts note, "We continue to prefer Value over Growth, Rising Momentum, Low Quality, High Risk, and Small over Large caps."
The bank notes that in July, top-performing Recovery stocks outpaced bottom performers by 2.4%, with notable outperformance across nine of 20 sectors and in six of eight countries.
Furthermore, they state that the recent decline in the CMI was primarily driven by a significant drop in Germany’s IFO index and a decrease in European 10-year bond yields.
These factors were only partially offset by improvements in the Global EPS Revision Ratio, which hit a 28-month high, as well as better GDP forecasts and Producer Price Index (PPI) data. The BofA Leading Indicator remained unchanged due to a lack of new data.
Looking ahead, analysts highlight the importance of remaining cautious, stating, "In the 11 episodes of ‘Recovery’ in the past, 5 have had a monthly decline in the indicator, but only 3 have resulted in a ‘Recession’ come back."
While uncertainty looms, BofA emphasizes that the preference for Value over Growth persists in both Recovery and Recession scenarios.
The bank identifies Energy, Insurance, UK, and Utilities as sectors that offer promising opportunities, providing re-rating potential during recovery and stable cash yields during recession.