European equities are trading at fresh record highs, and JPMorgan Chase (NYSE:JPM) & Co. strategists say the rally can go on and even expand to markets that have been left behind.
The Stoxx Europe 600 Index closed at a historical peak last week after earnings optimism outweighed spreading coronavirus fears. To JPMorgan strategists, the fact that the European benchmark has risen above the level of 400 index points by about 8% is significant because in prior years a gain above this level was followed by months of heavy declines.
But this time things are different, the strategists say. Unlike in the past, Eurozone manufacturing is starting to rebound, providing a favorable basis for a further advance in stocks. Additionally, just 23% of the Stoxx 600 companies and four country indexes are currently trading at record highs, leaving room for the rally’s expansion.
“There is a potential for short-term coronavirus-induced disruption in the first-quarter data flow, but we remain bullish on the global cycle, continuing to argue that U.S. recession is unlikely ahead of the presidential elections,” said JPMorgan strategists led by Mislav Matejka. “The breadth of the breakout could easily widen.”
The rally in global equities has been resilient to virus concerns, with investors continuing to buy risk assets on optimism that the economic impact of the epidemic will be limited. While the euro is trading near its lowest since 2017, economic data have been more encouraging for European stock investors, with January euro-area manufacturing slightly exceeding an initial estimate.
JPMorgan strategists raised euro-zone stocks to overweight at the end of September, correctly forecasting the continuation of gains, which have since reached about 9%. The analysts are underweight U.S. and U.K. equities and overweight euro-zone stocks.
Other factors that are in favor of the Stoxx Europe 600 Index, according to the strategists, are rising dividends and a valuation discount relative to bonds and global equities. The Stoxx 600 Index is trading at 15.4 times estimated earnings, relative to 17.5 times for MSCI World.
A bounce in bond yields is also expected to help European equities, with banks being particularly sensitive, according to JPMorgan. This, in turn, should boost Spanish and Italian stocks as well as domestic sectors, the strategists said.
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