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BofA to UBS See European Stocks Rally After Tough First Half

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·4-min read
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(Bloomberg) -- After what is poised to be the worst first half since 2008 for European equities, strategists are optimistic that at least some of the losses will be clawed back by the end of the year.

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The Stoxx Europe 600 Index will end December at 467 index points, implying 14% upside from Tuesday’s close, according to the average of 15 forecasts in Bloomberg’s monthly survey. That would still represent a 4% drop for the year after strategists cut targets by nine index points on average in the past month.

“The next quarter may remain choppy and volatile, but we should not be far from the peak of pessimism,” said Societe Generale SA strategist Roland Kaloyan, who has a year-end target of 415 points for the Stoxx 600, just above current levels.

European equities continue to struggle and fell to the lowest since February 2021 last week as worries about an economic slowdown mount amid rising inflation and the monetary tightening needed to tame it. The Stoxx 600 has dropped nearly 17% this year and isn’t far from joining the S&P 500 in a bear market.

According to Bank of America Corp. strategists including Thomas Pearce, the Fed tightening cycle is now “fully priced,” which should help the Stoxx 600 to re-rate. They have a target of 430 points for the benchmark and last week raised their stance on European stocks to neutral from negative for the first time since October 2021.

The strategists stopped short of turning positive “as for now we still see growth risks as skewed to the downside and the risks for real yields as skewed to the upside relative to our expectations,” Pearce said.

Looking Cheap

A 9% drop in the Stoxx 600 since the start of the month has taken the index closer to the lowest target in the panel of 380 points. That was set in late February by TFS Derivatives Stephane Ekolo based on what he believed to be an over-optimistic earnings consensus among analysts.

“We cannot envision any improvement, and we think that the strong and persistent inflation that we are currently experiencing will translate into a demand destruction, which should lead to margins pressure,” Ekolo said in an interview Wednesday. “Not the kind of environment constructive for equity markets.”

After a severe de-rating this year based on forward price-to-earnings multiples, European equities are looking cheap versus history and, as they have done for years, relative to their US peers. And although the earnings consensus is likely to fall in coming months, some see the region as an opportunity.

“On a sector neutral basis, the European market has almost never been cheaper relative to the US than it is today,” said UBS Group AG European equity strategist Sutanya Chedda, in emailed comments.

Chedda sees the Stoxx 600 ending 2022 at 480 points, with both upside and downside risks ultimately subservient to the direction of energy prices. UBS economists expect weaker, but not stagnated growth in Europe for the rest of the year, coupled with meaningful disinflation in the second half after a few months of uncomfortably high price increases.

Buy-Side View

On the buy-side, big investors remain cautious about the region. According to the June Bank of America survey, European fund managers are split about potential returns for stocks, with 32% expecting them to rebound by at least 5% over the next 12 months, and 34% seeing scope for the selloff to continue.

And Ray Dalio’s Bridgewater Associates has built a $10.5 billion bet against European companies, almost doubling its wager in the past week to its most bearish stance against the region’s stocks in two years.

“Given the structural headwinds, I think we should be pleased if stock markets provide us with an average annual return,” said Klaus Kaldemorgen, a portfolio manager at DWS Group, in written comments.

For tables on the Euro Stoxx 50 and Stoxx 600 polls click here; for a table on the DAX poll click here, for a table on the FTSE 100 poll click here.

(Updates with Bridgewater Associates in 13th paragraph)

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