(Bloomberg) -- What a difference four years make. The last time a broad gauge of European stocks set a record high was in April 2015. At the time, David Cameron was U.K. prime minister, Donald Trump hadn’t announced his candidacy, Angela Merkel was set to become Time Magazine’s “Person of the Year,” and the Swiss National Bank had just abandoned its euro ceiling.
Fast-forward to now and the Stoxx Europe 600 is again making a run at that peak, as it did unsuccessfully in each of the past two years. This time could be different, even if we get another dip along the way. In support, the Fed has become increasingly dovish, the ECB is looking at new ways to help the economy, China is in stimulus mode and Brexit might soon find its epilogue. A vast majority of investors are underweight European equities ahead of the earnings season kicking off next week.
Europe has lagged behind other markets in a catch-up rally of a region plagued by political instability, sluggish growth and a preference for U.S. equities -- boosted by technology and fiscal measures. The rise of the euro in 2017 was also a drag and since then, the single currency has dropped significantly. Despite being cautious on European shares, Amundi strategists believe euro-zone growth should gradually recover by the end of the year, driven by household consumption.
“Valuations are less compelling, as many undervaluation gaps closed during this year’s rebound. On the other hand, the participation in the rally has been low, and this could further support the positive momentum,” the strategists write.
Market sentiment is also hinting at an increasingly bullish mood, especially for stocks, Commerzbank (DE:CBKG) strategists say, adding that any dip in the market should be bought.
It’s not an entirely rosy picture though of course. The 2019 rally has been propelled by cyclicals like miners, retail and technology -- sectors that could run out of steam after surging more than 20 percent this year. So European equities may face a few more hurdles before achieving new highs. Positive news on the political front and stronger earnings growth are needed to support further upside, Amundi strategists write, highlighting an ageing bull market.
Sylvain Goyon, head of strategy at Oddo, says that with earnings growth for 2019 expected at 5 percent and a target cost of equity of 8.45 percent, he’s struggling to see upside for the market.
“In a nutshell, I either need much more earnings-per-share growth or much lower cost of equity (below 8 percent) to create more upside,” Goyon says. “With GDP growth reverting to potential I doubt the first, while the second seems a bit aggressive.”
The technicals are also starting to look stretched. We’re reaching important resistance levels of the 2018 highs, and the market has been going in and out of overbought territory. It’s another challenge to overcome if European equities don’t want to fall at the final hurdle.
In the meantime, Euro Stoxx 50 futures are trading down 0.1% ahead of the open.
SECTORS IN FOCUS TODAY:
- Watch Airbus and other trade-sensitive names after U.S. President Donald Trump’s administration proposed putting tariffs on a range of EU goods in response to the harm the U.S. claims has been caused by EU subsidies for the plane manufacturer. Watch Airbus and suppliers to the group, including Rolls-Royce (LON:RR), Melrose Industries, MTU Aero Engines and Safran (PA:SAF), as well as trade-sensitive sectors autos, industrials and chemicals.
- Watch oil stocks after crude jumped again overnight, rising to the highest since early November, following an escalation of fighting in Libya and Trump saying he would designate Iran’s Revolutionary Guard as a terrorist group. OPEC may have finally mastered the art of cutting production, while global oil demand is about to get a boost from a rule that’s supposed to help the environment.
- Watch the pound and U.K. stocks as Theresa May heads to Berlin today to meet German Chancellor Angela Merkel and French President Emmanuel Macron, with the latter having been keen to stress in recent weeks that a long delay to Brexit should not be taken for granted.
COMMENT:
- “Despite being one of the strongest rallies for risky assets, flows into equity funds have been weak YTD,” Goldman Sachs (NYSE:GS) strategists write in a note. “Historically fund flows tend to be closely correlated with equity performance, but the recent divergence is one of the largest since the GFC. This metric suggests a lot of investors have not participated in the equity rally and this has increased ’FOMO’ (fear of missing out).”
COMPANY NEWS AND M&A:
- Telenor to Buy 54% Stake in Telecom Operator DNA for EUR1.5B
- Trump Responds to EU Airbus Subsidies With Threat of New Tariffs
- SocGen to Cut 1,600 Jobs in Restructuring Plan: Les Echos
- Novartis Will Complete $5b Share Buyback This Year
- Givaudan First Quarter Like-for-like Sales +6.3%
- Nestle Said to Gauge Interest From Smithfield, Cargill for Herta
- Sika Sees Full Year Sales CHF8 Bln
- Rio Tinto (LON:RIO) Says Assessing Damage From Fire at Dampier Port Ops.
- Rio Tinto Says Paid $6.6 Billion Taxes, Royalties in 2018
- Total’s Papua LNG Project Signs Gas Pact With PNG Government
- Maersk Says Container Sector to See Cost Rise of $15B on IMO2020
- British American Tobacco (LON:BATS) Chairman Burrows to Step Down: Sky
- Glaxo Venture’s Two-Drug HIV Regimen Wins U.S. Approval
NOTES FROM THE SELL SIDE:
- Morgan Stanley (NYSE:MS) says generalist staffing firms should outperform as macro data becomes more supportive, upgrading Randstad to overweight. Market appears to be assuming zero years of future growth for generalist staffers, but earnings momentum should improve compared to specialist recruiters and with valuations this cheap, the risk-reward is skewed positive.
- Citi raises its estimates for market volume as well as price assumptions for onshore wind, especially U.S. and India, after more positive commentary at the WindEurope conference, according to a European wind power note. Maintains buy ratings for Vestas, Siemens Gamesa.
- Zalando raised to buy from hold at Liberum, with 50% increase in PT to joint-highest among analysts tracked by Bloomberg (EU45), as analyst sees the retailer on course to become the “go-to fashion destination” in Europe.
TECHNICAL OUTLOOK for Stoxx 600 index:
- Resistance at 392.7 (July high); 403.7 (100% Fibo)
- Support at 385.7 (76.4% Fibo); 374.5 (61.8% Fibo)
- RSI: 67.6
TECHNICAL OUTLOOK for Euro Stoxx 50 index:
- Resistance at 3,516 (76.4% Fibo); 3,596 (May high)
- Support at 3,403 (61.8% Fibo); 3,309 (50% Fibo)
- RSI: 69.2
MAIN RESEARCH AND RATING CHANGES:UPGRADES:
- Cancom upgraded to buy at Berenberg
- Fugro GDRs upgraded to buy at Kepler Cheuvreux; PT 13.50 Euros
- Porsche SE upgraded to add at AlphaValue
- ProSieben upgraded to outperform at Macquarie; PT 18 Euros
- Ramirent Upgraded to Hold at Handelsbanken; PT 6.20 Euros
- Randstad upgraded to overweight at Morgan Stanley
- Tikkurila upgraded to hold at SEB Equities; PT 15 Euros
- UBM Dev Upgraded to Buy at Erste Group; PT 47 Euros
DOWNGRADES:
- Bechtle downgraded to hold at Berenberg
- Biogaia cut to hold at SEB Equities; Price Target (NYSE:TGT) 440 Kronor
- ElringKlinger downgraded to sell at AlphaValue
- Go-Ahead downgraded to hold at HSBC; PT 20.10 Pounds
- Hays cut to equal-weight at Morgan Stanley; PT 1.85 Pounds
- Pennon downgraded to neutral at JPMorgan (NYSE:JPM); PT 7.80 Pounds
- Richemont Downgraded to Underperform at Credit Suisse (SIX:CSGN)
- SAP downgraded to hold at HSBC; Price Target 110 Euros
- Severn Trent (LON:SVT) downgraded to neutral at JPMorgan; PT 20.50 Pounds
- Snam downgraded to hold at Kepler Cheuvreux; PT 4.70 Euros
INITIATIONS:
- Aedifica Rated New Hold at SocGen; PT 85 Euros
- Bushveld Minerals Rated New Buy at Peel Hunt
- Datagroup rated new buy at Berenberg; PT 47.50 Euros
- Evry rated new buy at SEB Equities; PT 40 Kroner
MARKETS:
- MSCI Asia Pacific up 0.2%, Nikkei 225 up 0.1%
- S&P 500 up 0.1%, Dow down 0.3%, Nasdaq up 0.2%
- Euro little changed at $1.1263
- Dollar Index down 0.05% at 97.01
- Yen up 0.13% at 111.34
- Brent little changed at $71.1/bbl, WTI up 0.1% to $64.5/bbl
- LME 3m Copper up 0.5% at $6505/MT
- Gold spot up 0.2% at $1299.4/oz
- US 10Yr yield down 1bps at 2.52%
MAIN MACRO DATA (all times CET):
- 9am: (IT) Istat Publishes Revisions to GDP, Deficit, Debt for 2018, 2017
- 10am: (IT) Feb. Retail Sales MoM, est. -0.2%, prior 0.5%
- 10am: (IT) Feb. Retail Sales YoY, prior 1.3%
