JPMorgan Chase & Co. strategists are calling time on their preference for euro-area stocks over their US peers.
“We believe that the time has come to close the trade of overweight Eurozone vs the US,” strategists led by Mislav Matejka wrote in a note on Tuesday. After gains for euro-zone stocks in the past seven months, investors “should be locking in these gains,” he said.
The MSCI European Economic and Monetary Union Index rose by almost 28% in local currency since a low at the end of September, about twice as much as the S&P 500 over the same period. The outperformance has been even more striking in dollar terms, as the European gauge soared 45%, boosted by the surge in the common currency against the dollar.
Europe benefited from China’s reopening and a less-severe energy crisis than initially anticipated, while the economy has also held up relatively well. JPMorgan says these tailwinds are showing signs of fading, with economic surprises in the region now turning negative.
Morgan Stanley strategists said today that expectations of strong corporate earnings in Europe in the first quarter have now been priced into stocks. While regional profits are beating expectations by the most since at least 2007, the MSCI Europe Index has dropped about 2% since the start of the season, strategists including Giorgio Magagnotti wrote in a note.
JPMorgan’s Matejka expects more defensive sectors — including staples, utilities and healthcare — to keep gaining traction this year, underpinning the downgrade of the euro-area, which “has always been a global cyclical value play,” to underweight.
During the past year, when JPMorgan said it held the overweight call for euro-area stocks over the US, the MSCI Index for the region rose 17% in local currency compared to a 4% gain for US stocks. Overall Matejka turned cautious on the outlook for stocks toward the end of 2022 after remaining positive for much of the year while stocks were plunging.
Despite the strong outperformance, euro-area stocks remain extremely cheap compared to their US peers, trading at about 30% discount based on forward price-to-earnings ratios. But cheap valuations are unlikely the provide a cushion for the region in the current recessionary environment, according to the strategists.
“The region still screens cheap, but it historically acted as a high beta play on the way down, when discounting past US recessions,” they wrote.
The downgrade of euro area stocks isn’t a call to prefer the US, as the region remains an underweight, too. Matejka’s favorite regions are the UK, Japan and some parts of developed markets equities like Switzerland.
--With assistance from Joanna Ossinger and Sagarika Jaisinghani.
This article was provided by Bloomberg News.