European stock exchanges will beat Wall Street. Indeed, it could be said at this point, Piazza Affari will beat Wall Street: this is what emerges from the report on the strategy of global equities “Global Equity Strategy” signed Credit Suisse.
The analysis shows that the investment bank’s strategists remain top overweight sull’Europa, identificando i winner in Italy and Spain.
In the same report, however, the rating emerges small underweight on the US stock market.
Credit Suisse: overweight on Europe, here’s why
“We keep our top overweight on Europe. We believe there are six key supporting elements to our thesis. Credit Suisse lists them:
- “Europe has a greater potential for GDP growth than the United States. In fact, the European GDP is 3% lower than its peak (pre-Covid) compared to the US GDP, which is 1% higher than the previous maximum “. It is also highlighted that “Europe is the only region in which Credit Suisse’s outlook on GDP is better than that of the consensus, both for 2021 and for 2022”. In general, the “rebound in GDP should be supported in Europe by less tax tightening and high excess savings (6% of GDP), as well as the presence of fewer signs of a shortage of workforce and lower inflationary pressures, compared to what is happening in the United States ”.
- “As a rule, Europe is the area to focus on when bond rates or inflation expectations increase. And we believe that it will be so “. An example? “Inflation expectations in Germany have risen to a maximum in six years”
- Valuations are still a supporting factor for (European) equities. “Based on our model, the current one European ERP (equity premium risk) stands at 8.1%, compared to the justified one of 6.5% (again based on our model), and this suggests that ERP will continue to decline in Europe. The P / E is still relatively affordable (18% discount).
- Excess liquidity is higher than in any other region and it appears that the ECB will reduce its net purchases (of assets, which take place with the PEPP) to a limited extent, buying bonds worth next year. 700 billion euros (while the Fed will stop buying -the assets- by the end of next year. Practically in the second half of 2021 and next year, the ECB will be the one that will print the most money “.
- Our positioning is still cautious. We see different levels of capitulation and usually when things change it presents a better performance.
- Relative earnings reviews are more robust relative to global markets.
Equities, Credit Suisse: Italy and Spain are the top picks in Europe
In his Credit Suisse report he also explains the reasons why, in his opinion, Italy and Spain are the best bags in Europe:
- Their economies are weaker than their pre-Covid pandemic levels, which means their growth potential is greater, at a time when tourism is picking up;
- I’m the main winners of the Recovery Fund, or the Next Generation EU;
- They tend to benefit more when bond yields rise;
- Italy has never priced the recent decline in spread BTP-Bund and the spread itself has not widened, at a time when Bund yields are rising ”.
- Both bags they are overweight financials versus cyclical non-financial stocks (both Spain and Italy are overweight)
- The ratings are attractive. In particular, Spain is helped by its exposure to Latin America, “and we are overweight on Mexico”, as it emerges in the section dedicated to global emerging markets.
Still, “we prefer Southern Europe over Germany (therefore compared to the Frankfurt stock exchange) as:
- We believe that the PMI indices have peaked
- Equities in Germany and China have never priced in the slowdown in China’s SME indices (which means there is downside potential for these exchanges)
- Relative earnings reviews are in line with their underperformance.
Credit Suisse analysts, however, specify that they are “still overweight on Germany in a global context”, because there is a big difference between the performance of the German stock exchange and the new orders, as shown by the global SME indices. Another factor is that China is likely to launch new stimulus measures in the fourth quarter; and, again, the valuations of German equities appear particularly convenient ”.
That said, the real winners of European equities, they are, in fact, Italy and Spain.