Morgan Stanley expecs continued EU stock outperformance, FTSE among preferred investments
Equity strategists at Morgan Stanley told clients that they expected European Union stocks to continue outperforming, given what they described as a "benign" macroeconomic backdrop.
The European Central Bank's recent "pivot" meanwhile reinforced arguments for a rotation into so-called value stocks, prompting them to remain 'overweight' on Financials, Commodities, Telecommunications and the FTSE.
They also noted how the German interest rate curve was near its steepest for two-years despite recent the ECB's pivot.
Helping matters was the fact that core consumer prices were running at an annual rate of just 2.3%, versus 5.5% in the States.
"As we discuss here, we do not think a more hawkish ECB policy path derails the case for EU stocks," they said.
Other positives for EU stocks included 'bullish' trends for companies' earnings per share and price-to-earnings multiples that had already "largely normalised".
Consensus estimates for company earnings remained very downbeat on 2022 growth, yet EPS trends remained positive with earnings revisions actually accelerating year-to-date despite the market volatility.
Indeed, consensus was anticipating EPS growth of 6% for 2022, which was less than Morgan Stanley economists' forecast for nominal GDP growth.
Furthermore, the equity risk premium in Europe was "above average", they estimated.
So while they nudged lower their forward P/E assumptions for their MSCI Europe December 2022 index targets from 15.0 to 14.5, to reflect a tighter monetary policy backdrop than previously anticipated, they added that "we see limited risk of a larger, sustained de-rating".