Deutsche Bank cautious on European equities in near-term

Strategists at Deutsche Bank reaffirmed their year-end target for the pan-European Stoxx 600 index but cautioned clients that further weakness might lie ahead over the coming months, before a recovery took place in the final stretch of 2017.

The broker's target for the Stoxx 600 was kept at 375, roughly 3% below where it stood when Deutsche issued its research report.

In their opinion, over coming months momentum in euro area purchasing managers indices was set to 'fade' for the simple reason that they were too strong at present.

At 55.8 points, survey compiler Markit's subindex for new orders in the euro area's manufacturing and services sector was pointing to GDP growth of 3%.

Yet no forecaster was projecting GDP growth higher than 2.1% with Deutsche Bank itself expecting a rate of expansion of just 1.8%.

"This suggests that Euro area PMI momentum, i.e. the six-month change in PMIs and a key determinant of European equity price momentum, will turn negative by the end of the summer, which should weigh on European equities over the coming months," they said.

Hence, the broker said it remained 'underweight' European cyclicals versus defensives, although later in the year the Stoxx was expected to rise back.

Despite Deutsche's generally cautious views, it lifted its recommendation on the mining sector from 'underweight' to 'benchmark' on the back of recent weakness and because they now saw no downside in the price of copper by year-end.

Furthermore, they expected the Stoxx to rise back towards the end of the year.

"We expect the market to undershoot this target on the back of the fade in PMI momentum and look to turn tactically positive on the market on signs of a trough in PMI momentum in Q3," the strategists said.

By countries, Deutsche Bank said it remained 'overweight' UK shares but 'underweight' German ones.

Deutsche Bank also expected European stocks to underperform their US peers because positive 'macro surprises' in the States were seen rebounding from negative levels.

Regarding possible 'upside' risks, Deutsche singled out a reduction in European political risks.