BofA: European stocks plunge 8%

Her Eleftherias Kourtali

European stocks have outperformed global stocks lately, but Bank of America estimates that this trend will not continue and sees a dip of 8% in the near future, thus maintaining an underweight stance.

More specifically, as he notes, European stocks significantly outperformed global markets since the beginning of March, recording a rally of 5%, while global stocks fell. European stocks generally tend to perform structurally lower, given the weak underlying earnings per share (EPS) growth, in part due to the underlying underlying economic fundamentals.

However, cyclical factors have supported Europe’s relative performance over the past two months:

(a) the euro / dollar exchange rate fell by around 5%, close to the fastest depreciation rate since the start of the ECB QE in early 2015, with the weaker euro strengthening the local currency value of European corporations’ foreign exchange earnings ( which make up about 50% of the total), and

(b) while the real yield on 10-year German bonds has risen by 80 basis points since early March, the real yield on 10-year US bonds has risen by 120 basis points, suggesting greater pressure on global bond valuations than European bonds. shares (with the P / E of the Stoxx 600 being generally stable at 13x, while the P / E 12 of the MSCI World fell by about 5% to 16x).

“We remain underweight in Europe relative to global stocks. Overall, our macroeconomic forecasts mean a drop of 8% for European stocks or a decline to 410 points for the pan-European Stoxx 600 index and a 5% sub-yield for European stocks relative to global stocks. shares until the beginning of the fourth quarter “, as noted by the American bank.

At the same time, it expects that the cyclical factors driving Europe ‘s relative performance will become less supportive, given that:

First, global growth is expected to slow further. Expects the global PMI to continue to fall from 54 at the end of last year to 51 due to the weakness in the Eurozone and the shock to energy prices in the US and China (due to lockdowns for Covid and recession in the real estate market). Given its cyclical exposure, the European market tends to perform lower than global stocks when global PMIs fall below the historic average of 53.5.

Secondly, the slowdown in the euro area is likely to be particularly serious. BofA’s macroeconomic forecasts point to a 6-point weakening of the euro area PMI by the end of the third quarter, compared with a 3-point drop for the US, as Europe is hit hardest by the energy shock. The more severely weakening domestic growth relative to global growth, the slower the relative performance of European stocks will be.

Third, there is little room for further downward trend in the euro / dollar exchange rate. “We see a modest further uptrend for the commercially weighted dollar index due to favorable interest rate differences and growing macroeconomic uncertainty, but we believe that most of the strength of the dollar against the euro has already materialized,” he said.

Finally, he expects real yields on US bonds to begin to weaken in the coming months as the Fed raises interest rates. This will ease the pressure on global stock prices, while there is still room for a modest further uptrend in real euro area interest rates, as they are lagging behind the recent US move.

Based on the above, BofA emphasizes that it remains negative for European stocks and maintains a marketweight stance in the roundabouts against defense stocks, while it is overweight in utilities and food and beverages. Its macroeconomic forecasts suggest an 8% dip in Europe by the beginning of the fourth quarter and a significant underperformance relative to global equities.