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17 Jul 2017

Bank on banks


Nearing normal: How sectors could react to higher bond yields

We’re very positive on eurozone equities right now, but a backdrop of rising yields, rising inflation and an end to ultra-accommodative ECB policy means every call comes with a lot more riding on it. Knowing how a particular sector is likely to react could make all the difference. 

If you’re only going to read one table this week; make it this one.

Sector sensitivity at a glance

Sector P/E P/B Dividend Yield Sensitivity %Domestic Revenue
Automobiles and Parts 9.22 1.22 3.11 ++ 48.41%
Banks 36.56 0.9 4 ++ 71.82%
Basic Resources 20.07 1.4 2.45 + 35.67%
Chemicals 20.1 2.44 2.5 -- 39.34%
Construction and Materials 21.56 2 2.5 + 58.45%
Financial Services 11.8 1.75 3.16 ++ 40.13%
Food & Beverage 28.9 3.43 2.6 -- 36.29%
Health Care 28.3 3.8 2.88 -- 28.42%
Industrial Goods and Services 28.19 3.5 2.37 -- 47.58%
Insurance 13.61 1.18 4.47 ++ 65.15%
Media 42.75 3.25 3.25 -- 56.41%
Oil and Gas 32.44 1.12 5.64 + 44.80%
Personal and Household Goods 23.18 4.74 2.57 -- 35.56%
Retail 23.14 2.5 3.54 - 80.69%
Technology 41.31 3.11 1.5 - 36.61%
Telecommunications 50.53 1.63 4.7 - 72.57%
Travel and Leisure 20.67 2.75 3.24 -- 62.50%
Utilities 63.12 1.56 5.85 -- 87.89%

Source: SG Equity research, Factset, Bloomberg. * Sensitivity to bond yield ( a proxy for rising inflation) - measured by taking the average between 2 and 10yr correlation to 10yr US treasury and bund yield

Bank on banks 

  • Rising bond yields will push investors to switch from growth stocks to value stocks, like financials and consumer discretionary, as the former generally carry much longer duration.
  • Banks come out strongest, and remain a pure cheap way to play eurozone reflation; Automobiles and Parts and Insurers also appear attractive. Banks ultimately offer a robust hedge against a steepening yield curve as well as rising inflation expectations. 
  • Lyxor STOXX Europe 600 Automobiles & Parts UCITS ETF
  • Lyxor STOXX Europe 600 Insurance UCITS ETF 
  • Defensive sectors like Health Care and Consumer Staples (Food and Beverages, Personal and Household Goods) have, unsurprisingly, been used as bond proxies in recent years. They are now expensive, and they exhibit a negative correlation to bond yields.


All data: SG Cross Asset Research, Equity Strategy, Factset, June 2017.

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