July 28, 2014, 8:17 a.m. EDT
Buy European stocks on the dips, says J.P. Morgan
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By Carla Mozee, MarketWatch
LONDON (MarketWatch) — Investors should look to buy European stocks during pullbacks, in part because of an improvement in earnings trends, J.P. Morgan Cazenove said on Monday.
As well, “easing FX headwinds and the continued robust global PMI picture are here to stay. This, in turn, keeps us constructive on equities and in buying the dips mode,” said equity strategist Mislav Matejka in a note to clients.
A third of European companies in the Stoxx Europe 600 index XX:SXXP -0.04% that report quarterly earnings have done so for the latest period, and 56% have beaten estimates — the highest proportion in the last three years, said the broker.
Bloomberg
Earnings in the euro zone are poised to grow for the first time in four years, and recovery in the region has reduced “depressed levels” of private consumer and corporate demand.
The broker highlighted its recent shift toward equities with exposure to global growth and in emerging markets, and upgrades for the mining, construction and materials, IT and industrial sectors. While European domestic plays “are not at the top of our pecking order anymore,” investors should consider rotating into constituents in the Stoxx Europe 600 that are highly sensitive to euro- zone activity that have fallen the most over the past few months, it said.
Stocks leveraged to euro-zone activity that have dropped the most from the first-half peak include platinum miner Lomin PLC UK:LMI +0.42% , banking firm Barclays PLC UK:BARC +0.12% , network-gear maker Alcatel-Lucent FR:ALU -0.14% and electrical supplies distributor Rexel SA FR:RXL -0.57% .
Top European equity picks include oil major BP PLC UK:BP -0.46% BP -0.39% , chemicals and precious metals company Johnson Matthey PLC UK:JMAT -0.03% and cement maker Holcim Ltd. CH:HOLN -0.20% .
Among its other calls, J.P. Morgan remains overweight peripheral banks. It also advises a rotation into the German DAX for the second half of the year after having Italy as its top market pick during the first half of 2014.
It’s underweight U.K. stocks as they are heavily weighted in defensives and commodities, putting them at risk of further underperformance “as value style is back in favor.”
The Stoxx 600 is flat this month, and up by about 4% this year. The U.K.’s FTSE 100 UK:UKX +0.08% is up nearly 1% for July and for the year.
Earnings, FX improvement
While per-share earnings revisions are still negative in Europe, evidence points to a pickup in the per-share growth momentum, with regional earnings expanding by 10% year-over-year so far in the second quarter.
Two factors are driving the improvement of earnings dynamics in Europe. Firstly, foreign exchange “is becoming less of a drag from the translation perspective,” in part as the euro has weakened from its highs, wrote Matejka.
Secondly, the historically key drivers of global growth — the U.S., China and emerging markets — are seeing a pickup in activity. Europe, which has experienced a somewhat of a slowdown over the past few months, “is likely to rejoin” the lead in growth, with J.P. Morgan noting a preliminary reading of private-sector activity in the euro-zone has returned to recovery highs.
Last week, Markit reported the euro-zone composite PMI rose to a three-month high of 54.
Assessing top-line results, European equities strategist at Morgan Stanley on Monday said they “haven’t seen the broad-based revenue weakness of prior quarters” during the second quarter. A net miss of 1% in sales expectations has been “a large improvement on the 13% average net miss seen in the last three quarters. A large part of this is likely due to softening in the euro through the second quarter, they said.
Meanwhile, Société Générale told clients on Monday that it remains “prudently optimistic on euro -zone equities, following the release of resilient earnings so far and a very accommodative policy,” from the European Central Bank. “If euro depreciation continues, it will represent a clear buying opportunity for European equities.”
On Friday, Goldman Sachs downgraded its three-month view on global stocks to neutral. The analysts maintained their views on regional allocation, underweighting the U.S. on both a three-month and 12-month view that is balanced by an overweight position in Europe over three months, and both Europe and Japan over 12 months.