Forget chips — UBS says to load up on this global sector instead

Published Thu, Mar 9 20238:02 PM ESTUpdated Fri, Mar 10 20231:21 AM EST

European equity investors should stay steer clear of semiconductor stocks and load up on banks this year, according to UBS' Head of European Equity Strategy Gerry Fowler. Speaking to CNBC's "Street Signs Europe" Thursday, Fowler noted that interest rates in Europe were set to rise, and this should contribute to positive earnings revisions and push up stock prices by 20% from current levels. "[European] banks has been one of our favorite sectors, it still is," said Fowler, who joined the Swiss investment bank at the end of last year after a seven-year stint as a fund manager at asset manager Abrdn. "We think that rates in Europe are going higher and will continue to contribute to positive earnings revisions, but they're also still cheap," he added. Banks benefit when interest rates rise because it increases the difference — or net interest margin — between the interest earned on loans and the interest paid on deposits, which translates into greater profits for the bank. In a positive interest rate environment, banks generating a profit should be valued at a price-to-book (P/B) ratio of at least 1, Fowler noted, but several well-run bank stocks are trading below these levels. "No one has really acknowledged" this phenomenon, he added, despite a "structurally higher" earnings potential. A P/B of more than 1 indicates that the total market value of the bank is more than the bank's assets, which includes potential earnings from lending. This means investors are pricing in growth in future earnings. Elsewhere, on U.S. stock exchanges, SVB Financial on Thursday revealed plans to raise more than $2 billion in capital in a bid to offset losses from bond sales. The announcement spurred a sell-off across the financial sector as investors grew increasingly concerned that higher interest rates would result in banks facing losses on loans due to borrower defaults. The financial sector was the worst performing within the S & P 500 at a 4.1% drop — its worst day since 2020. According to FactSet data, there were 24 banks in the Stoxx Europe 600 Banks index with a P/B ratio of less than 1. British bank Barclays ' shares are expected to rise by the most on the list, up 46% over the next 12 months, according to the average price target of 18 analysts. The index is accessible to investors through a number of ETFs, such as those from iShares (Ticker EXV1-DE) and Lyxor (Ticker BNK-FR). Cautious on chip stocks, pharma Fowler urged caution on semiconductor stocks — something of a hot sector this year — which he described as a "tactical decision." While he said he has "absolutely no problems with semi- and semi-equipment," he noted that one of the banks' themes this year was that if the euro rises strongly, European companies with a lot of dollar exposure could end up with significant earnings headwinds. This could impact a number of semiconductor companies based in Europe, he said, although not Dutch chip toolmaker ASML , which invoices customers in euros. European pharma companies would also be hit by a strong euro, Fowler added. On the other hand, he advised investors to avoid sectors that did well in Europe last year, such as defensive companies and those exposed to the strong U.S. growth and the dollar's strength. He noted that this year would see weak U.S. growth and a weak dollar, making pharma and household and personal products weak choices.