JPMorgan sees European equities higher at year-end, recommends buying DAX

European equity markets are likely to end the year higher, JPMorgan Cazenove said in an equity strategy note, adding that it’s time to buy the DAX.

It said that while most tactical indicators are not signalling to buy anymore, stocks will end the year higher.

“Equities appear to be rolling over again, and the terrible events in Paris will not help sentiment. However, we note that historically terrorist incidents didn’t tend to weaken the markets for long, and we believe that equities will still end the year higher than the current levels.”

JPM highlighted the fact that the Citi Economic Surprise Index for the US moved above zero last week, for the first time this year.

Citigroup’s economic surprise indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises and a positive reading indicates economic releases have largely beaten consensus expectations.

JPM pointed out that when CESI goes from negative to positive territory, stocks usually perform well over the next one to six months.

In addition, the bank stuck to its September call that Chinese activity was likely to stabilise, which is now seeing some confirmation. It said this was more visible on the consumer side, with a pick-up in retail and car sales, but also construction starts rising.

JPM said if the Fed does go ahead and raise rates in December, this won’t be a significant problem for equity markets.

It pointed out that historically, the first Fed hike has been a confirmation that the recovery is sustainable, rather than the sign of a policy mistake, adding that the S&P500 has tended to be higher six months post the first hike.

JPM said that regionally, Germany stands out. If China is stabilising, Germany should benefit, as it was one of the main victims of the summer emerging markets scare.

Also, the bank said a resilient IFO argues against a big fall in German earnings per share.

The European Central Bank is likely to act further, which would constrain the euro, said JPM, noting that Germany is the key exporter.

Also, the subdued oil price helps the DAX as it has no energy weight, said the bank.

Finally, it said the DAX is trading at near 30-year price-to-earnings lows versus the other markets, so not priced for perfection.