It might be scary, but Mario Draghi is here to help. Yes, you’ve climbed a long way, European stocks are up 160 per cent from their 2009 lows, including 7 per cent or so this year. Now is not the time for faint hearts, however.
So says the still optimistic Jonathan Stubbs at Citi, at least. Halfway through the year and the strategy team budge not from their forecast: 20 per cent total return from European equities this year.
Shares are no longer cheap in absolute terms, but we stay bullish due to: 1) progressive global economic recovery in 2014-15, 2) return to double-digit earnings growth in 2014-16E, 3) super-cheap relative valuations, eg vs credit, 4) rising risk appetite, eg M&A, demand for equity. ECB QE later this year should also be supportive.
Citi is in the growing camp of banks who expect Quantitative Easing from the ECB later this year, which means good things for the pheripheral parts of the continent, and financials.
Indeed, the focus list of the bank’s analysts’ 15 to 20 favourite stocks is striking for its inclusion of a few insurers and banks, alongside the target rich environment of pharmaceutical takeover candidates and industrial recovery plays (click to enlarge).
Although most of those stocks also screen well for surplus cash flow and balance sheets relatively unencumbered by debt, and note the sectors’ location in this chart for shirehorse spotting (cheap and strong = bottom right):
The point being that spotting earnings momentum is now essential, as markets overall are no longer cheap and stock valuations within them have compressed. Next year is the one where earnings finally start to meet expectations, we promise.*
More in the usual place.
*ish.
Related Links:
B b b b b b b boom! (UK edition) – FT Alphaville
Earnings needed - FT Alphaville
Three things long short funds cannot do well – FT Alphaville
