Put your money in the bank, Morgan Stanley tells clients
Corporate earnings in Europe will be flat this year, but stocks in the region are relatively undervalued versus bonds, although investors would be well advised to remain relatively wary regarding their exposure to emerging markets, one of the world´s largest brokers said.
Profits at companies from the European Union will show no growth in 2015 but equity markets are already discounting this, Morgan Stanley said in a research note e-mailed to clients.
On a more positive note, earnings are set to rise by 7% and 10% in 2016 and 2017. Indeed, price-to-earnings multiples are set to rebound following the recent correction in stockmarkets, the broker´s analysts said.
"Potential increases in US rates and EU inflation are generally negative for PEs, but we believe they can be offset by the ECB’s ongoing QE program and the deep relative undervaluation of stocks versus bonds," the research team led by Graham Secker said.
With its market timing indicators flashing a 'full-house' buy signal the broker opted to remain 'overweight' on stocks with exposure to the Eurozone and the periphery versus the UK. Secker also said he "liked" banks, although in his opinion it would be best to remain 'underweight' so-called defensive stocks.
"We remain overweight EMU exposure & Banks ... we continue to recommend investors overweight EMU exposure given our economists’ expectation of further GDP improvement and the ECB’s ongoing QE program. Italy remains a key overweight. Banks are our preferred way to play a positive view on EMU. Within cyclicals we are overweight selective domestic plays."
These analysts´ new forecasts implied a 12-month price target for the MSCI Europe benchmark of 1550 points, which offered 11% upside from current levels, not including a further 3-4% return from dividends.
Despite their generally cautious stance towards emerging markets, Morgan Stanley added that: "At this stage we remain heavily UW EM/China exposure, but look for an opportunity to add to this area as we move through the remainder of the year. The commodity sectors are likely to be most sensitive to any shift in sentiment toward China, perhaps as a result of further stimulus announcements."
Likewise, although they remained 'underweight' so-called 'defensives' Graham Secker, Matthew Garman, Krupa Patel and Lillian Huang upped their recommendation on large-capitalisation stocks to 'neutral'.