RBC Wealth Management have warned of possible downside in European equities in 2023 but highlighted favourable valuations as a mitigating factor for the region.
RBC Wealth Management’s outlook for 2023 struck a cautious tone and said they see an opportunity in positioning towards defensive sectors and companies with a global presence.
Overall, RBC said they were underweight European equities but suggested a discount to US stocks and low valuations have already accounted for a European recession.
“We continue to recommend an Underweight position in European equities given the prevailing uncertainties. However, we acknowledge that the long list of downside risks is partly reflected in sharply discounted valuations and extreme investor caution,” said Thomas McGarrity, Head of Equities at RBC Wealth Management.
“Based on a forward 12-month price-to-earnings (P/E) ratio of 12.9x, the MSCI Europe ex UK Index is trading at a discount to its 10-year median of around 14.5x. On a relative basis, the discount to U.S. equities is much steeper than typical, even taking into account sector differences.
“We continue to prefer defensive sectors over cyclicals, and maintain our bias for quality, globally diversified companies that possess strong pricing power. In particular, we see opportunities in companies which are global leaders within the pharmaceuticals, technology, luxury, and capital goods industries. We are also beginning to see select opportunities in deeply discounted cyclicals where valuations already appear to price in the prospect of a European recession, particularly in sectors such as Industrials and Materials.”
Europe is being particularly heavily hit by energy prices and domestic economies are facing a tough start to the year. This would justify the defensive positioning going into 2023.
However, despite the challenging outlook, RBC argue much of the bad news is largely priced in, and the current valuations are attractive enough to take a measured approach to cyclical names.