Becoming less negative on Europe
Markets are unimpressed today by Europe finally agreeing to bail out Greece for the second time, with European stocks down -0.6% on the day.
But here’s some encouraging news: Credit Suisse has become less negative on Continental European stocks for the first time in almost two years.
The bank has moved to benchmark weighting from 5% underweight for a currency hedged portfolio.
We think that the ECB is increasingly dovish (and we would not rule out another three-year LTRO after the one on 29 February), which should help weaken the euro; and we now only expect a 1% decline in European credit (down from our previous estimate of a 5% decline); relative to other regions, economic momentum and earnings momentum have troughed. But there is not enough for us to raise weightings to overweight.
In CS’s earnings momentum scorecard, Europe ex-UK has moved up one place, off the bottom of the list, with a total score of -0.1 — above Japan’s -1.2.
On previous occasions when relative Continental European earnings revisions have troughed, Europe ex UK equities have on average outperformed 75% of the time and when they did outperform, it was by 3–5% in the next three to six months (in local currency terms).
The bank still attaches a 10% possibility to Greece leaving the euro zone this year, and a 5% likelihood of a disorderly break-up of the currency union.