Yesterday our colleague Joe Weisenthal explained why the European bailout plan could be wildly bullish for European stocks. Morgan Stanley’s European Strategist Teun Draaisma seems to agree.
The firm switched from underweight European equities to overweight in a May 10th European strategy piece. They’re really hoping to play this market like a fiddle, given they went underweight Euro equities on January 25th, and caught MSCI Europe’s 13% descent as of last Friday.
We think we are in a cyclical bull market for equities, because we are optimistic on earnings growth, driven by EM, US and corporates. We are bearish on European GDP growth, especially in the periphery, but European earnings are a play on global growth. We recognise there is a risk that the cyclical bull market has ended, if the sovereign crisis leads to a double-dip for European earnings next year. This is not our current view, and our EGLI (earnings growth leading indicator) is predicting 59% earnings growth for the next 12 months, while MSCI Europe now trades on 10x 2011 IBES PE. Our target of 1280 implies 20% upside and 13x PE, 10% below the long-term average of 14.5x. We view this correction as a buying opportunity.
Sentiment and valuations point to upside:
This correction could already be over. While there is a chance that the market remains sceptical and pushed the ECB to outright QE, we think valuation is attractive, sentiment has fallen quite a bit, and we may now have seen the fundamental trigger.
Valuations attractive. Good value has now emerged, with the market on 10x 2011 IBES PE, and our CVI below zero, suggesting an 85% chance of rising markets the next 6 months. Our combined market timing indicator, too, is at zero, with similar odds of up markets the next 6 months.
Some signs of capitulation. Some sentiment surveys have fallen a lot in optimism, in particular the MS Global Risk Demand Indicator and the CBOE put / call ratio. Other sentiment surveys have not shown a big fall yet, in particular the AAII survey at +11.
And here it is, the sound-byte:
As the saying goes ‘when authorities start panicking, the market can stop panicking’. Authorities need to get ahead of the curve, in particular with respect to Spain and the banking sector. We will be monitoring the authorities’ actions closely. Lower commodity prices, lower US and German bond yields, the European authorities’ initiatives, and the 2 trillion Yen of money market injection by the Bank of Japan are incremental recent positives.
Basically, as Joe said yesterday, “Don’t fight the Fed, and don’t fight the ECB!” …or a global coordination of major central banks for that matter. Sounds like both are on the same wave length.
(Via Morgan Stanley, European Strategy, Tuen Draaisma, 10 May 2010)
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