Equities: Stay positive with a value-cyclical tilt

Highlights:

• Following a monster rally in stocks last autumn, multiples are well above historical averages, but equity investors can count on lingering low yields, tighter credit spreads and increasing central banks’ balance sheets which in turn maintain low the cost of equity and the discount rate of future cash flows.
• The equity risk premia fell due to the sharp decrease in policy uncertainty and poor Fixed Income returns should keep them tight. Our positive 2021 equity view relies on earnings upturn and not on any equity multiple expansion.
• Earnings should increase appreciably in the next two years: for the euro area (EA) we forecast profits to grow by more than 40% in 2021 and some +14% in 2022 (back to 2019 levels by H2 2022), with risks on the upside.
• Value and cyclicals have outperformed last autumn and will continue to do so over the coming months. We favour Japan, UK and EMs and prefer EMU vs US over 12 months.

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