BofA Merrill Lynch has managed to trump JP Morgan’s optimism, and is targeting a 30 per cent gain for European equities next year.

Strategist Gary Baker says valuations remain attractive and top line forecasts are too conservative given that macro estimates are (apparently) showing 7.5 per cent nominal GDP growth in 2010.

He expects earnings growth of 35 per cent next year and 15 per cent in 2011 as companies reap the benefits of recent cost cutting.

As such, he says, it is too early to jettison cyclical stocks and start buying optically cheap defensives:

Upgrade SXXP (Dow Jones Stoxx 600) target to 315= 30% total return.
In an act of seasonal rebellion we are not changing our positive strategic view for European equities despite the passing of a calendar year. Valuations look attractive at 9.9x 2011E and we view 315 as a comfortable 12-month SXXP index target on forecast EPS of €21.6 & €24.8 for 2010/11 (+35%, +15% respectively).

Maintain cyclical preference.
Upgrade travel & leisure A market featuring strong earnings revisions, attractive valuations, expected portfolio flows into equities and investors positioned defensively (in our latest FMS data) means we are in no rush to shift out of cyclical exposure. We still favour materials, energy, banks and industrials, and upgrade travel & leisure as an unloved consumer discretionary play. Investors are unlikely to lose money picking up optically cheap defensives such as utilities, telcos & healthcare, but with rate rises not expected before H2 it looks premature to jettison cyclical exposure, in our view.

Supportive (and improving) macro environment.
We forecast global GDP growth of 4.4% in 2010 (6.3% from emerging, 2.7% developed, 2.2% for EU) and 4.5% for 2011. Govt. stimulus and central bank liquidity have played heroic roles in reaching this state but it is no longer just about liquidity; we see macro and valuation support for equities at current levels. Credit markets remain supportive: open for new issues and with possible further spread tightening (sovereign concerns are real but currently manageable, in our view).

Top line forecasts look too cautious.
Consensus data suggests a 12% fall in top line sales for EU corporates (exfinancials) in 2009 (compared to an average fall of <2% in the past 2 recessions); and yet consensus is currently forecasting <4% sales rebound for 2010. This looks too cautious in a recovery year given macro forecasts already showing 7.5% nominal GDP growth. Any pricing stability and/or volume pickup should have a dramatic impact on earnings forecasts, boosting already attractive valuations.

This entry was posted by Neil Hume on Tuesday, December 8th, 2009 at 10:50 and is filed under Capital markets. Tagged with bank of amercia, gary baker, merrill lynch. Edit this entry.