Analysts at JPMorgan see political uncertainty as a major obstacle for euro zone stocks, despite some favorable fundamental factors.
“Eurozone stocks were relatively stable in the first and second quarters but have recently fallen on rising political uncertainty in France,” the analysts said.
With China's stance being more positive and the ECB easing monetary policy, eurozone fundamentals appear stronger than those in the U.S., but investors shouldn't jump in just yet.
“Current uncertainty still needs to be resolved,” JPMorgan warned. While valuations are attractive, euro zone stocks have not yet reached oversold territory, the analysts said, adding that an improving political outlook, particularly the upcoming French elections, would be key.
JP Morgan does not see the French situation as a “game changer,” but does acknowledge short-term risks: “The RN could win more votes than currently assumed,” the analysts said, which could lead to the new government potentially testing the limits with “more aggressive fiscal easing.” This could force financial markets to rally and send stocks lower further.
“As the second half of the year progresses, it could be a good time to buy eurozone stocks,” JPMorgan concludes. But for now, the analysts recommend a wait-and-see approach, as “further downside risks are elevated and surrender is unlikely.” They favor defensive sectors, are cautious about consumer staples investments, and see growth stocks outperforming value stocks.
