European defensive stocks set to increase

By Giles Coghlan, Chief Currency Analyst at HYCM

US-China trade tensions have now moved from being a war of words into action. In recent days the US Senate bill that could potentially de-list some Chinese companies has changed the mood. We can now expect a range of ‘tit for tat’ responses as retaliation and counter-retaliation likely escalates. Sadly, antagonism and protectionism is going to be made worse, rather than better, by the COVID-19 induced slowdowns. The relationship between US and China is under unnecessary strain, but these two countries account for 40% of the world’s GDP, so the whole world will be impacted.

How will different stock sectors perform?

Sectors like travel, leisure, banks, and insurance should underperform in the present environment with lockdown impacting their bottom line. Banks will also be hit by the low interest rate environment. The UK sector is one area to watch as Bank of England’s Governor Bailey has been inching closer to the idea of negative interest rates in recent days.

Eurostoxx in focus

For Eurostoxx the worst May performers in terms of metric points have been HSBC, Compass (catering), and L’Oreal (cosmetics). The best performers have been ASML, Nestle, and Roche. Looking at the European indexes the more defensive benchmarks of the DAX and the FTSE are likely to keep gains ahead of France’s CAC, Spain’s IBEX and Italy’s FTSE.

Events to watch

The Euro saw some relief last week on the German – Franco proposal of a €500 billion relief fund. However, remember that the proposal still needs all 27 member states to agree, so it remains to be seen if the economic stimulus is accepted. Most analysts project that 2Q earnings will be worse than Q1 earnings and present 2021 estimates may still not reflect the reality as the lockdown continues. The current consensus is for EPS to be 6% below 2019 profits, so it is reasonable to expect defensive sectors like tech and healthcare to continue to perform well.

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