Patrik Lang, Head Equities (Julius Baer) | We have downgraded eurozone equities to Underweight given slower earnings recovery expectations, increasing political risk and unfavourable sector exposure. In our view, relative valuations do not fully reflect these negatives. On the other hand, we have upgraded US equities, which should benefit from a relatively fast post-Covid-19 recovery.
Our economists have reduced their forecast for eurozone growth to -7.2% (from 1.1% pre-crisis). This has negative implications for our earnings growth forecasts, especially for eurozone equities, where we now expect earnings to decline by 40% this year. Sector adjusted valuations of European equities versus US equities are only at a low-single-digit discount versus historical averages and do not compensate for below-average growth perspectives and above-average political risk. Relative to other countries, like the US or Japan, limited fiscal flexibility and a reduced ability to coordinate and finance a broad-based policy is another relative disadvantage of the region and a potential headwind for growth. Finally, we believe that a possible breakup of the eurozone due to an acceleration of the already existing divergence trends will increasingly become a topic. The latter has a low likelihood but is a high-impact risk, which worsens the risk-return characteristics of eurozone-domiciled assets. As a result of this, we expect eurozone equities to underperform in the foreseeable future and have thus downgraded the region to Underweight.
In contrast to the eurozone, we expect the US economy to recover relatively fast from the Covid-19 crisis and to reach pre-crisis levels again as soon as in Q3 2021 (vs Q4 2022 in the eurozone). This should support US earnings over the coming 12 months. Additionally, US equities will continue to benefit from their strong exposure to fast-growing technology and internet stocks (around 28% of the S&P 500 as a percentage of market capitalisation versus 5% of the Stoxx 600), which are relatively immune to the quarantine measures. Against this backdrop, we consider US stocks to be relative winners in a post-Covid-19 world and have thus upgraded the region from Neutral to Overweight.