Just two months ago, European equities looked quite expensive. The Euro Stoxx 50 index had increased 27 percent between January and April to a high of 3,828. And the euro had finally stemmed its long decline against the dollar, which wasn’t a good omen for exporters. Accordingly, Credit Suisse’s Investment Committee downgraded its view on European equities from outperform to neutral. But the downgrade didn’t last long. Late last month, the committee reinstated its outperform view on Europe, while keeping its global equities outlook at neutral. The view remained in place even as the Greek debt crisis built to a crescendo over the last three weeks. For a time, it seemed quite possible that the brinksmanship surrounding Greece’s bailout negotiations would ruin the sentiment helping to drive the European stock market’s upward climb. But even when it seemed like a distinct possibility that Greece would leave the euro, Credit Suisse believed markets had little to fear. The bank’s Investment Committee said on July 6 that a “Grexit” would likely only serve to prod the European Central Bank to beef up its monetary stimulus, a likely positive for the stock market. Considered in that light, the turbulent political negotiations provided attractive entry points to the European market. The Euro Stoxx declined 14 percent between the April 13 high of 3,828 and a July 7 trough of 3,294, before bouncing back to 3,670 just over a week later, just 4 percent off the high. Credit Suisse’s optimistic outlook is premised on the Eurozone’s strengthening recovery and continuing currency weakness due the ECB’s quantitative easing program. Rising consumer confidence, bolstered by an improving labor market and lower energy prices, is driving the current recovery. The European Commission’s headline Economic Sentiment Indicator was 103.5 for the euro area in June, near its highest level since 2011. Also, while industrial production peaked in April, Credit Suisse thinks strong business confidence surveys augur for a rebound in the third quarter. Then there’s the euro, which is expected to weaken further against the dollar. The sectors that are best positioned to take advantage of the current conditions are banks, exporters and consumer-related companies, according to Credit Suisse’s Private Banking & Wealth Management Division. Exporters obviously benefit from the depreciating euro, while consumer-related companies should see a bump from rising sentiment. Meanwhile, the European Central Bank’s quantitative easing program is helping to increase profits for commercial banks by holding down bond yields and driving up prices, which is good for banks’ fixed-income portfolios. Financial institutions are also benefiting from rising consumer demand for credit. Credit Suisse also believes current market expectations are overly pessimistic. The 12-month forward earnings per share forecast for European equities sits at the same level as it was at the height of the financial crisis. Credit Suisse believes positive earnings surprises are likely to push equity prices higher. With the Greek situation approaching some sort of resolution, the most obvious risk to the European recovery has all but disappeared. And with Federal Reserve Chair Janet Yellen having confirmed recently that the central bank will most likely raise benchmark interest rates later this year, the euro will almost certainly depreciate further against the dollar. The case for European stocks is still a strong one.Join the conversation about this story »
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