BofA ML eyes contrarian auto and telecoms play

A contrarian trade in the automotive and telecommunications sectors has emerged in Europe over the last month, Bank of America Merrill Lynch (BofA ML) research argues.

Gary Baker
Gary Baker

The BofA ML European Fund Manager Survey shows a record number of European asset managers have taken their allocations to the automotive sector to an overweight.

About a net 25% of asset allocators have an overweight to the automotive and parts sector, up by five percentage points over the past month.

At the same time, fund managers have scaled weightings to telecommunications stocks back to new lows.

Gary Baker, European equity strategist at BofA ML, says the telecommunications sector has not played out as a defensive sector, owing to weaker profit outlooks, undercut valuations and some dividend reductions.

However, Baker adds: “You’ve got a very strong contrarian trade that is signalled in Europe this month of selling autos and buying telecoms. You’ve got autos at an all-time record overweight and telecoms at an all-time record underweight.” (article continues below)

Technology remains the strongest overweight among European asset allocators overall, with a net 33% of respondents being above their benchmark in this sector. This is the highest reading in four years.

Banks have shown “further positive momentum” in Europe over the past month, Baker adds, although he says the gains have been relatively small.

Construction, real estate, retail and utilities are the strongest underweights in this month’s survey, with a net 40% of respondents saying they hold underweight allocations in these sectors.

Technology, energy, pharmaceuticals and industrials are the largest overweights on the global stage, while utilities, banks and insurance were the strongest underweights.