Goldman Sachs and JPMorgan Are Betting on the European Stock Market

Investor bets on a global economic bounce, which is fueling a recovery in stocks that have been left behind in the rally, signal good times for the European equity market in 2021.

Strategists from JPMorgan Chase & Co. to Goldman Sachs Group Inc. are bullish on the laggard market’s outlook. On average, the 24 strategists surveyed by Bloomberg are positive on European equities, seeing about 4% upside for the Stoxx Europe 600 this year, and 5% for the Euro Stoxx 50, compared with Wednesday’s close.

After a tumultuous 2020 that saw Europe lag behind the S&P 500’s strong recovery, the market known for its high presence of value stocks in such sectors as banks and energy is off to a flying start this year. Optimism over vaccines and generous stimulus plans to kickstart major economies has helped European equities outperform the U.S. According to JPMorgan, this trend can continue.

“The potential better performance of value cyclicals, especially financials and commodities, is typically a big tailwind for Europe,” JPMorgan strategist Mislav Matejka said in emailed comments. “The region will be a beneficiary of the global growth recovery, as well as a likely reflationary shift, similar to what was witnessed in 2016-2017.”

The wide range of the survey’s forecasts shows a positive risk-to-reward dynamic, with the most bullish strategist, Makor Capital Markets SA’s Stephane Barbier De La Serre, seeing the index ending the year 16% higher, while the most bearish Stoxx 600 prediction, from TFS Derivatives’ Stephane Ekolo, implies 7% downside.

To be sure, predictions of the European market’s outperformance haven’t always come to fruition in recent years, let down by the region’s slower earnings growth and political tensions. And some strategists note that share prices have already raced ahead, leaving less room to digest any setbacks on the economic or vaccine front.

“We’ve already seen equity markets rise 20% since October, so some of the recovery we expect this year has been priced,” said Goldman Sachs strategist Sharon Bell, in emailed comments. She sees total returns of about 8% in 2021 for European stocks, describing that as a good result, “but not particularly stellar,” and said the recent rally had made equities more vulnerable to disappointments.

“It seems likely that markets will be a bit bumpy, but the backdrop is still supportive of equities,” Bell said in emailed comments.

The Stoxx 600 is about 6% off its pre-pandemic record high, and the consensus signals that the index won’t be able to completely fill that gap this year, given alreadylofty valuations. Investors started pricing in a potential return to normalcy after the first positive vaccine updates, but the recent tightening of virus curbs and an extension of lockdowns across Europe have tempered enthusiasm.

Still, BNP Paribas equity strategist Ankit Gheedia remains optimistic, seeing scope for further euro-area outperformance. Profit margins at European companies have demonstrated a high correlation with the inflation rate and should benefit from a reallocation by global investors into value sectors, he predicts. “Europe is the only region that has been left behind in the latest risk-on rally in terms of fund flows,” Gheedia said in emailed comments.

U.K. Outperformance

As for U.K. stocks, with a Brexit deal at last in the bag, strategists expect an end to the years of underperformance that followed the 2016 referendum. Their average prediction is that the FTSE 100 will finish the year at 7,147, implying an advance of about 11% in 2021.

“Vaccine rollouts and fading Brexit concerns should drive a rebound in the global economy in 2021, driving further value rotation and so boosting the U.K. equity market,” Citigroup Inc. strategist Ayush Tambi wrote in a note on Jan. 12.

Other strategists agree withthe bullish view on U.K. equities, even if some, like Barclays Plc’s Emmanuel Cau, expect London’s weighting in defensive stocks to be a drag preventing them fromoutperforming the euro area.

Makor Capital’s Barbier De La Serre expects climbing U.S. Treasury yields to drive continued divergence between outperforming value and cyclical stocks over growth and defensives.

“It remains our deep conviction that the current monetary, fiscal and macro mix should, mechanically if not logically, command 2021 returns on risk assets in general and global equities in particular more in mid-double digit territory than the tepid mid-single-digit gains anticipated by the consensus,” Barbier De La Serre said.

— With assistance by Ksenia Galouchko, and Jan-Patrick Barnert

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