May 22, 2018 / 9:46 AM / 10 months ago

Deutsche Bank downgrades European energy to 'underweight' after strong gains

FILE PHOTO: The headquarters of Germany's Deutsche Bank is photographed early evening in Frankfurt, Germany, January 26, 2016. REUTERS/Kai Pfaffenbach/File Photo

LONDON (Reuters) - Deutsche Bank strategists downgraded European energy to “underweight” from “benchmark” on Tuesday, recommending investors sell the sector they see as over-valued, arguing it is likely to fall back after strong year-to-date gains in crude prices sent it surging.

Brent crude LCOc1, the global benchmark, topped $80 a barrel last week for the first time since November 2014. Its rise has helped Europe’s energy stocks .SXEP climb 15 percent year-to-date, leading sector gains.

“The historical relationship with the oil price suggests that with Brent crude at $79 per barrel, the sector is currently around 4 percent above fair-value - and would have 7 percent downside relative to the market until end September if oil stays at current levels,” said Deutsche Bank strategists in a note.

If crude prices weaken from their current levels the sector could suffer even more, they added.

In the same note, strategists at the German bank turned more positive on European bank stocks, upgrading the sector .SX7P from “underweight” to “benchmark” after a period of underperformance.

“Further downside looks limited as the drag from Euro area PMIs dissipates,” they said. Bank stocks have lagged the market so far this year on signs of slowing economic growth in the euro zone.

Deutsche Bank’s strategists stopped short of recommending investors actively buy the sector, however, saying Euro area growth projections still do not imply stellar gains ahead.

The bank’s European equity strategy team also upgraded insurance from “underweight” to “overweight”, and downgraded utilities from “overweight” to “benchmark”.

Reporting by Helen Reid, Editing by Kit Rees

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