T. C. | “Europe is the place to be this year. That at least is what Morgan Stanley analysts say: “With economic momentum improving (and with a three-year visibility), strong earnings growth, lower relative valuations, tighter investor positioning, US flows growing, buybacks at lows and improving, positive inflation effect, Bunds yields at 0% and the Recovery Fund, could see Europe beat all regions for the first time since 2000 (being especially positive on Italy and the UK, where we reiterate Overweight – we miss Spain on this list, by the way).”
According to MS, Europe has better growth momentum: “the European economy has been later in recovering than its peers, which should mean that growth momentum should remain strong for longer than in other regions where the initial rebound has been slower. Added to this, the Eurozone is one of the few regions where GDP growth in 2022 is expected to be higher than in 2021.”
And an “Earnings outperformance: Europe’s poor performance during 2020 was largely due to worse EPS trends. After this drop, strategists estimate EPS growth in 2021 of 30-40%, well above any other region, especially the US.
Add to this the Recovery Fund: “the launch of the fund in the second half of the year will support growth for 2022 and beyond. This will have a much more relevant impact on the periphery.” MS economists estimate a 2.4pp boost to GDP in Italy and Spain in 2022.
Bund yields at 0%: the European equity market should be a beneficiary of global reflation and rising bond yields. MS strategists see Bund yields rising to 0% by June 2022, which should serve to encourage more investors to add risk in the region.
Cheap relative valuations: European equities are at a 13% discount to the MSCI ACWI (in N12M PE) which doubles to 26% if we take into account Price Book and Dividend Yield. Add to this the fact that the region is the most correlated (positively) to higher bond yields and inflation, while the risk premium remains well above the rest of the regions.
Reduced positioning: although flows into Europe from Americans were starting to be seen, record inflows into global funds have not been seen in Europe (cumulative flows into Global funds over the last decade have been USD 700bn vs USD 100bn outflows for Europeans). Hedge Funds’ net positioning in the region has plummeted during 2020 and is at historic lows.
