SchroderSalomonSmithBarney (SSSB) believes European equity returns of 15%-20% are possible over the ...
SchroderSalomonSmithBarney (SSSB) believes European equity returns of 15%-20% are possible over the next 12 months.
The prediction, according to SSSB, is underpinned by a return to the recovery valuations seen in mid-1999 leading to expectations that equities will be further re-rated against bonds.
It is a view that many fund managers and economists such as Chris Tracey, economic director at JP Morgan Fleming, and Henderson Global Investors' John Botham, do not share ' both seeing more limited upside during the coming year.
SSSB is favouring industrials, financials and technology stocks over the more defensive areas of the market. Heartened by the better economic news emerging over the first quarter and the evidence of a US recovery, the investment bank believes there are signs that Europe is on the mend.
Stewart Breed, an economist at SSSB, says: 'Given our optimistic outlook for economies and equity markets, our clearest decision is to underweight those defensive sectors that performed well in 2001. We suspect the utility and consumer defensive sectors will lag in a rising market.'
Overweights are a more difficult call, he says, noting that the industrials traditionally offer exposure to improving economic cycles. 'Financial stock valuations remain undemanding and should benefit from improving equity markets. Although valuations look intimidating, some of the tech sectors could offer the highest market and beta.'
Tracey disagrees, however. He says: 'Our European portfolios remain weighted towards industrial cyclical stocks that will benefit from the global recovery. We are also seeking exposure to stocks that can demonstrate good earnings momentum. We remain underweight telecoms due to continuing balance sheet concerns. In our global portfolios, Europe ex UK remains overweight due to its valuation advantage over the US.'
He says eurozone's economic growth is expected to remain uninspiring over the next few months, therefore leading him to believe that European growth will lag that of the US.
Tracey adds: 'But European stock markets have the substantial advantage of trading at a large discount to the US, with the P/E differential between the two at its highest level for more than a decade. European balance sheets are also in better condition than in the US.'
Botham says: 'Our view is a recovery is happening right now. We do not believe the economy is going to see a double dip this year, but the recovery, led by the US, will be more anaemic than we have seen historically when the US is in a recovery situation. The upside in markets this year will be lower than in past years.'
Botham forecasts that 10%- 15% will be a good return on European equities during 2002 and during the next decade.
Breed says top-down investors have been looking to embrace the improving macro data and are favouring higher risk assets. Within equity portfolios, this confidence is reflected in sector weightings towards financials and even the beleaguered information technology stocks.
But, he says, bottom-up investors are still cautious. 'They do not see much evidence of the profit recovery needed to justify the recent re-rating of equities. As such, many continue to favour more defensive asset allocations and sector strategies.'
Equities are being re-rated.
P/E valuations between Europe and US are wide.
European in comparably better condition.
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