The Morgan Stanley team is sticking to its guns when it comes to their optimistic outlook for European equities. Despite skepticism from clients, they believe there is a 9% upside for the MSCI Europe index in 2024. In fact, they argue that this estimate may be too conservative, with a potential total upside of 14% when considering dividend yield and buybacks.
An Attractive Risk-Reward Profile
Contrary to popular belief, the team at Morgan Stanley sees an attractive risk-reward profile for European equities, leaning more towards their bullish case. They even state that the biggest risk to their views is the possibility of not being bullish enough. Their top range estimate suggests a potential gain of 23% for the MSCI Europe index.
Looking Beyond Weak Earnings Growth
While concerns about weak European earnings growth persist, Morgan Stanley believes these concerns are backward-looking and fail to consider the boost expected from European Central Bank interest rate cuts in the second half of the year. Their revamped earnings model indicates a trough and the start of a recovery, with projected earnings growth of 9% for 2024 compared to consensus estimates of 5%.
Improving Economic Background
The economic background is poised to improve, according to Morgan Stanley. Lower inflation rates will lead to higher real household incomes and increased consumption. Additionally, recent credit survey data suggests that the worst may be behind us, as credit standards are no longer tightening.
In conclusion, despite initial skepticism from clients, Morgan Stanley remains optimistic about European equities in 2024. They highlight the potential for significant upside and argue that concerns about weak earnings growth are not fully justified. With an improving economic background and favorable risk-reward dynamics, European equities present an attractive investment opportunity.
Morgan Stanley Emphasizes the Importance of the U.S. Economy in Stock Market Earnings
Morgan Stanley brings attention to the misconception of placing excessive focus on the health of the European and Chinese economies in relation to stock market earnings. Instead, they argue that the stoic nature of the U.S. economy carries greater significance. The bank reveals that the exposure to the U.S. in terms of market capitalization is three times higher than Europe’s market-cap weighted China revenue exposure, with a 25.5% share compared to 7.8%, respectively.
Revisiting History: A Parallel to 1995
According to Morgan Stanley’s analysis, the current market setup bears resemblance to the conditions observed in 1995, when stock prices experienced a re-rating of price/earnings multiples following adjustments in Federal Reserve monetary policy. Drawing parallels, the bank anticipates a similar trajectory for European equities, projecting a re-rating to 13.8 times the next twelve month P/E by year-end, as opposed to the current levels of 13.1x. However, they exercise caution by assuming only half of the remaining re-rating, taking a conservative stance.
A Closer Look at Past Performance
Morgan Stanley points out that their conservative estimation may not align with historical outcomes. After the Federal Reserve pivots in both 1995 and 2019, Europe observed a re-rating to a P/E ratio of approximately 14.8 times. Consequently, there is potential for greater performance than initially projected.
Learning from History: Lacking Growth but Positive Outlook
The bank highlights a striking similarity in European growth patterns during the mid-1990s, characterized by lackluster growth. However, this did not deter the re-rating process that followed the Federal Reserve pivot as macro indicators experienced a trough and began a modest recovery.
Exploring Opportunities for U.S. Investors
For U.S. investors interested in monitoring the European market, Morgan Stanley suggests utilizing various securities, including the iShares Core MSCI Europe ETF IEUR. It is worth noting that this ETF has experienced a 1.5% decline year-to-date.
In summary, Morgan Stanley urges investors not to overlook the importance of the U.S. economy in stock market earnings. They draw a parallel between the current market conditions and the events of 1995 while exercising caution in their projections. By understanding history, investors can navigate this evolving landscape more effectively and identify potential opportunities in the European market.