Sector changes post Brexit

Credit Suisse reviews our sector weightings post the Brexit vote to conclude:

Add selectively to domestic UK sectors. We have been underweight domestic UK since last September. Sterling remains the critical driver for domestic sectors and we continue to target GBPUSD 1.20 into a full Brexit (GDP is likely to decline by 1% in 2017 against consensus of +0.5% growth). We upgrade non-London housebuilders to benchmark, as outside of London, the house price to wage ratio is not extended, the rental yield is c2% above the mortgage rate, it is a highly undisrupted sector where supply is two-thirds of required demand and government policy will likely remain supportive. We stay underweight London-centric plays (e.g. Berkeley Group and Foxtons) and UK REITs, especially office (Derwent).
We remain benchmark general retailing, purely on the basis of valuation (a near record 25% P/E discount to the UK market). We would highlight Kingfisher and ABF, the least sterling-sensitive retailers. Elsewhere, we upgrade UK life insurers to overweight from benchmark as, uniquely, they are duration-matched, the rally in their portfolio holdings of corporate bonds and equities since the vote should have more than offset the fall in real estate valuations, and thus portfolio valuations, and the P/E discount of life companies to asset managers is now extreme at 40%.

Remain benchmark European cyclicals. Continental European cyclicals look to be pricing in too much growth pessimism, and we add to employment agencies. Cyclicals are now trading at their cheapest against defensives since 2009 and have decoupled sharply from PMI new orders.
Sector risk appetite is an extremely low -1.7 standard deviations. The problem remains disruption, mixed US lead indicators, China and the yield curve, and hence we do not upgrade. We add to employment agencies (they are pricing in a 1.5% year-on-year decline in European employment) and are at valuations seen at the trough of a recession. We favour the temp-exposed stocks, which are less disrupted (Adecco and Randstad).

Adjust weightings within defensives. We reduce regulated utilities to underweight from benchmark, and hence take the entire European utilities sector to underweight. In the UK, it is the second most expensive sector and non-water utilities could be very significantly disrupted (from the accelerating decline in the cost curve for renewables, battery storage, energy switching and smart home technologies). Underperform-rated utilities are National Grid, Terna and Verbund. We add this money to big cap pharma, which is the cheapest defensive sector in the UK and Europe.
It has the best combination of valuation and earnings momentum, is relatively undisrupted and has strong self-help potential. We think that US political risk has been exaggerated. In the UK, pharma tends to be the best-performing sector when PMIs, gilt yields and sterling fall. We highlight Shire, Roche and Novartis.