European stocks can extend lead over the US: Morgan Stanley
A RECORD outperformance of European stocks against their US peers still has some ways to go, amid optimism over China’s reopening and a better earnings outlook, said strategists from Morgan Stanley.
Graham Secker, the bank’s chief European equity strategist, said that lower natural-gas prices and resilient economic data were also contributing to the rally that began three months ago. These allowed the MSCI Europe to break above its 100-week moving average relative to its US peer, in dollar terms, for the first time since the global financial crisis.
“Going forward, monetary policy will be tighter, fiscal policy will be easier, and value stocks will no longer play second fiddle to their growth peers,” he said on Monday (Jan 16). “This backdrop should be more favourable for the European equity market than that of the past decade or so.”
The Stoxx Europe 600 Index has surged nearly 30 per cent in dollar terms since the end of September, outpacing a 12 per cent rise in the S&P 500. Even so, valuations were still both cheaper than the US and below their long-term average. Strategists at Citigroup and Goldman Sachs Group have also expressed optimism about European stocks this month.
But not everyone shared that view. JPMorgan Chase strategists, led by Mislav Matejka, said they expected the rally to fizzle out through the first quarter amid continued risks from hawkish central banks, volatile inflation and weaker corporate earnings.
Meanwhile, Bank of America strategist Sebastian Raedler warned on Friday that stocks did not fully reflect the prospect of weaker economic growth.
Morgan Stanley’s Secker acknowledged that worse-than-expected economic data, a rebound in gas prices, or a bigger hit to European earnings from a stronger euro could spark some profit-taking in equities.
For now, though, light investor positioning, a higher total yield than the US for the first time in over 30 years, and a wider-than-normal divergence in regional sector trends make Europe more attractive, he said. BLOOMBERG
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