Our Chief Europe Equity Strategist explains why she is
forecasting a 23 percent total return for European equities over
the next year.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Marina Zavolock, Morgan
Stanley’s Chief European Equity Strategist. Along with my
colleagues bringing you a variety of perspectives, today I’ll
discuss why our mid-year outlook extends our bullish view on
European equities.
It’s Tuesday, May 28, at 10am in London.
We have recently updated our outlook for the year ahead,
maintaining our bullish view on European equities as we fully
incorporate and roll forward our mid-1990s “soft landing”
playbook. Like today, the mid-1990's was a period where markets
focused on rates, inflation, and related data above anything
else. The US and Europe saw soft and “softish” landings, the
Fed’s cutting cycle was slower than investors initially expected,
and there was an undercurrent of technological innovation.
European equities, in particular, are following the mid-1990s
path closely, and that means both a mid-cycle extension and a
strong market set-up.
We have high conviction in our constructive European equities
view and have recently raised our one year forward MSCI Europe
Index target to 2,500 – 18 percent potential upside. This brings
potential total return upside – if we incorporate dividends and
buybacks – to 23 percent.
So why do we remain bullish? Over the second half of this year in
particular we anticipate European equities ongoing re-rating is
likely to combine with an emerging European equities earnings
recovery. We’ve just come out of one of the strongest earnings
seasons Europe has had in several quarters and we anticipate this
is only the beginning. Our earnings model projects 7.5 percent
earnings growth by year end for MSCI Europe, which is almost
double consensus estimates. On top of this, we think the market
underappreciates a number of significant thematic tailwinds that
benefit European equities. These include rising corporate
confidence, an M&A cycle recovery that is leading the global
trend, an imminent start to rate cuts, high and rising capital
distributions including buybacks, and underappreciated AI
diffusion.
In terms of our sector preferences, structurally, we continue to
prefer Europe’s quality growth sectors. These include Software,
Aerospace & Defense, Pharma, and Semiconductors, along with
the Banks sector.
Shorter-term, we also believe a recovery in bond yield-sensitive
stocks has begun, which is expected at this stage in our
mid-1990s playbook. We expect this rally to be tactical and bumpy
but ultimately more powerful than a similar rotation that
occurred around the Fed pivot late last year. We recently
upgraded Building & Construction to overweight to play this
rotation.
Although we believe European equities are in the sweet spot over
the second half of 2024, we expect the bar for continued
performance to become tougher by the time we get into first half
of 2025. Also, our bear case incorporates rising geopolitical
risks and lower-than-expected economic growth – the latter in
line with our economists' bear case. A US election scenario that
would bring a change in the status quo is also a risk for
European equities, albeit it’s far more idiosyncratic than
broad-based according to our in-depth analysis.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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