Deutsche sees near-term consolidation in European equities, stays UW cyclicals
Deutsche Bank expects European equity markets to consolidate in the near term, before the normalisation in macro momentum and a more balanced sentiment picture offer a better entry point later in the first half.
STOXX600
518.56
17:50 04/10/24
In its latest equity strategy note, the bank maintained its year-end target for the Stoxx 600 at 375, which gives around 1% upside from current levels.
It highlighted four market drivers, three negative and one positive.
DB said macro momentum is unlikely to get any better, with the rebound in global growth momentum having been the main driver of the sharp move in rates and the equity market over the past six months.
“Global equity markets and European cyclicals versus defensives have continued to track global macro surprises, the most timely gauge of global economic momentum. This indicator continues to hover in the top 5% of its historical range, suggesting limited further upside.”
Deusche pointed out that on the five occasions it has risen to current levels in the past, it has usually faded back to zero over the following months. This would be consistent with a 5% correction in global equities and a 5% - 10% pull-back in cyclicals versus defensives.
In addition, the bank said its price-to-earnings model suggests the European P/E, at 15x, is around 5% above fair value.
“The recent rise in the US macro uncertainty index and the increase in the euro-area real bond yield (partly as a consequence of the widening in French and peripheral bond spreads) have led the fair value P/E on our model to drop to an 18-month low of 14.2x, pointing to around 5% downside from current levels.”
DB noted that sentiment is bullish, meaning a chunk of the good news is already priced into the market.
“The bull – bear ratio for US financial advisors and the US complacency indicator (P/E divided by VIX) are both at the highest level in at least 25 years, while cash levels for US equity mutual funds are at a six-year low.”
On the upside, however, Deutsche argued that earnings momentum remains strong, adding that the Stoxx 600 12-month forward earnings per share has risen by 2% over the past two months and it expects a further 6% upside by year-end.
The bank remains ‘underweight’ cyclicals versus defensives, a stance it has found to be a “non-consensus call”, with most sell-side analysts calling for more cyclical outperformance.
“Given that this has already been the longest cyclical rally over the past decade, with cyclicals outperforming by 25%, which has pushed the relative Shiller P/E to a 10-year high, this strikes us as overly optimistic.
“Our basket of European stocks with have a negative correlation to global macro surprises has outperformed the basket of companies with a positive correlation by 5% since the end of January (when macro surprises peaked). We think this outperformance has further to go.”