Sun, Apr 08, 2018 - Page 14 News List

European stock bulls keep calm even as threats loom

ACHIEVABLE GOALS:European firms’ earnings and valuation stories are expected to attract investment to the region, RBC Wealth Management director said

Bloomberg

Do not give up on European equities.

That is the message from firms including RBC Wealth Management, which has maintained its overweight rating on continental European stocks even as the region’s benchmark gauge has lagged its US peer this year.

Although trade tensions between the US and China continue to rattle global markets, bulls say European equities’ cheap prices and solid profit momentum can underpin stock gains.

“We expect the earnings story and the valuation story to attract investors to Europe going forward,” Frederique Carrier, a managing director and head of investment strategy at the US$510 billion wealth manager, said by telephone from London.

She found the consensus profit growth estimate of about 11 percent for the STOXX 600 this year “achievable.”

A strengthening euro, which harms Europe’s exporters, and weakening economic momentum have clouded the outlook for the region’s stocks in recent months.

The STOXX 600 price return between January and last month was the worst of any quarter in two years.

The index on Friday fell 0.35 percent to 374.82.

However, it still posted a weekly gain of about 1 percent from last week’s 370.87.

Deutsche Bank AG has said that cyclical sectors like banks, automakers and miners will bear the brunt of the slowdown in the pace of growth in Europe and globally.

However, for Carrier, the market still offers bright spots, including the potential for positive operating leverage to support earnings.

European company profits depend more on sales volume relative to peers elsewhere, given their higher fixed costs.

That means top-line growth can benefit more easily from a boost in economic activity.

German factory orders rebounded in February, data showed on Thursday.

The country’s central bank said the economy probably maintained its momentum in the first quarter of this year as companies work through their order books.

If history holds, European stocks are ripe for a rebound from their 7.4 percent drop since late January, Bloomberg Intelligence strategists Laurent Douillet and Tim Craighead said.

They said that the recent pullback has lowered the market’s valuation to a “less extended level,” an opinion shared by Morgan Stanley.

“Focus is understandably on protectionist trade rhetoric and currency, but we believe underlying revenue and earnings fundamentals are still sound,” Douillet and Craighead wrote in a note this week.

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