Based on this top-down view, we see strong reason to maintain an o/wcyclical and u/w-defensive sector stance. The rotation into defensives seen this year has moved to extreme levels relative to the softening in Euro area PMIs, suggesting a pricing of much deeper concerns around growth. We think this is unwarranted (middle right chart).

?In light of public QE, which our economists expect at the end of 1Q15, we expect investors to rotate away from over-valued defensives towards a more cyclical, credit-linked oriented sector stance. Sectors that we overweight into 2015 that should benefit from this include Autos & Parts, Banks and Insurance.

Post a potential announcement of public QE by the ECB, we think keeping track of domestic cyclicals (in particular Construction, Consumer and selected Industrial sub-sectors with a high revenue exposure to Europe) should be preferred in light of strengthening domestic demand in the Euro area. We also remain pro-‘value’. Market expectations seem to have decoupled from underlying fundamentals for many ‘growth’ stocks and they look unattractive from a risk-reward perspective, we think. Against the backdrop of a European (domestic) recovery gaining pace, ‘value’ should outperform ‘growth’ again.

Eoin Treacy's view

Here is a link to the full report. 

The result of the upcoming Greek election has the potential to create an issue for the Eurozone if the incoming party of power decides an exit from the currency union is in its best interests. However this represents a worst case scenario in what remains a high stakes game of brinksmanship. The ECB’s decision on whether to implement a large quantitative easing program is more important and is likely to strongly influence the performance of regional equity markets next year. 

The Euro Stoxx Index continues to range in a volatile manner above 300 and it will need to continue to hold that level if medium-term recovery potential is to continue to be given the benefit of the doubt. 

The Euro’s decline this year has already priced in the expectation that the ECB will adopt some form of QE. The Euro posted meaningful bounces from the $1.20 area in both 2010 and 2012 and similar upward dynamics will now be required to suggest demand is returning to dominance. 

The Euro Stoxx Food and Beverage Index is among those that benefitted most from the weakness of the currency. It broke a yearlong progression of lower rally highs in February and has held a progression of higher reaction lows since. A sustained move below 475 would be required to question medium-term upside potential.