UBS thinks we’ve reached peak “havoc” in European stock markets.
Their analysts have made the call to buy stocks that investors have been overly pessimistic about.
In an European Equity Strategy note sent out on Thursday, strategist Karen Olney and her team say now is the time to buy “value” stocks — steady but boring companies that look relatively cheap.
Value investors believe stock markets aren’t always efficient and as such you can pick up stocks that are “cheap” — undervalued by the market.
UBS say the “value gap” — the difference between Europe’s best and worst performing stocks — hasn’t been as high as it is now since the tech bubble of 2000, saying: “The distaste for value is back to the ‘growth love-in’ high of 2000.”
The bank blames the divergence on the collapse of oil prices, which have caused stock markets and many specific company stocks to tank over the last year and particularly since the start of 2016.
But UBS says this could be overdone and says: “If oil stabilises and/or rises from here, some of these valuation gaps might start to unwind.”
Meanwhile, top performing stocks are so oversubscribed and hyped that they’re almost certain to disappoint over the next year as expectations are so high.
The bank writes:
Today’s level offers a 20%+ return over the next 12 months if history is any guide. Contrast this with what Quality does (tends to go the other way). NOTE: we leave 2000 out of this average because it is so extreme, but it heavily supports the case for value.
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