Buy financial and energy shares and sell carmakers on rising euro, Morgan Stanley says

The euro is likely rise to against the dollar in 2018 and 2019, making European financial and energy shares attractive and carmakers a standout sector for selling, according to Morgan Stanley.

The bank’s foreign currency strategists forecast the euro to rise to $1.30 by December 2018 and $1.40 a year later, mainly due to dollar weakness.

The forecast rise is unlikely to have a big effect on Eurozone growth, inflation or monetary policy, Morgan Stanley’s analysts said. But a stronger euro is unhelpful for the bank’s positive stance on European shares.

A rising euro supports Morgan Stanley’s overweight position on financial and energy shares and more cautious view on cyclicals and defensive stocks.

Within the cyclical bracket, carmakers are a particularly interesting ‘sell’ candidate, the analysts, led by Krupa Patel, said.

"The sector looks overbought, is traditionally one of the most sensitive to FX strength and is facing a combination of a slowdown in global car sales at the same time that raw materials and labour costs are rising," the analysts wrote.

The analysts also said weaker beneficiaries of a strong euro are "the most overbought theme in the market". They listed the following shares as underweight-rated from that group: Nokian, Valeo, Renault, BMW, Faurecia, Tod's, Eni, Hannover Re, Aurubis and Eramet.