As if Europe needed any more fuel to the raging fire that has seen Italy collapse (remember ASSGEN: stock is halted, and CDS is 270-280, 100 bps wider than where we recommended it), futures plunge, and French banks resume the position, here is Merrill's report titled, apropriately enough, "Banks Cut" in which Bank of Countrywide Lynch analyst Gary Baker, CFA explains why he is "lowering bank weighting to neutral." We expect a witchhunt focued on Gary, which will culminate with him facing a court martial and/or tribunal for daring to tell a few ounces of truth about Europe's banking system.
Having hung onto a value argument for the banks sector YTD, our latest downgrade to global growth expectations makes it difficult to sustain conviction in this argument and we lower our sector weighting to neutral. As long as EU peripheral debt issues remain in the headlines despite the best efforts of the ECB, banks will likely remain a focal point for negative risk appetite and we believe this will weigh against optically cheap valuations and low investor positioning. This leaves us with defensive overweights in healthcare and telecoms and within cyclicals a preference for real assets- energy and mining- over chemicals and industrials. Our most recent sector moves have been to upgrade food & bev and downgrade autos.