UBS strategists have upgraded European banks to overweight from neutral and cut the more defensive pharma sector to neutral as they expect cyclical sectors to get a boost from the European Central Bank`s plans to scale back its bond buying programme.
"We highlighted previously (that) the cyclicals are looking more attractive as they have led EPS momentum but shown slight underperformance vs defensives. What is changing is we now have a potential catalyst in sight with the ECB tapering approaching," they said in a note.
They also said that the recent strengthening in the euro made them more cautious on U.S.-exposed stocks but more positive on domestically exposed companies.
The ECB is expected to announce the end of its 2 trillion euro plus bond-buying scheme later this year, even though concern among policymakers over a strong euro has fuelled expectations the stimulus will not be withdrawn quickly.
UBS said PMIs and earnings momentum in Europe all peaked back in May but believes this is a "mid-cycle pause" and already sees signs of the PMIs and earnings stabilising.
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