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JP Morgan analysts believe the second half of the year will be a good entry point into European stock markets.NYSEARCA:VGKThe company is listed in the Federated States of India (FEZ), according to a report by Equity Strategy.
European Stocks (VGK), (FEZ) vs. US Backdrop Continues Performance is expected to improve this year, with the European Confederation of Independent Trade Unions (CESI) outperforming the U.S. The European Central Bank has also started to ease interest rates, while the Federal Reserve has kept rates on hold for now.
Additionally, the improving performance of China (FXI) and (MCHI) will help Europe, with China’s valuation relative to the U.S. “is as cheap right now as it was in extreme situations like the TMT sell-off, the GFC and the Eurozone crisis,” analyst Mislav Matejka said.
However, the current uncertainty surrounding European stocks (VGK), (FEZ) needs to be resolved and avoid reaching an oversold extreme, he said.
But despite the uncertainty surrounding the French election and the resulting weakness, euro zone stocks have traded better than their U.S. counterparts during the second quarter. The VIX index (VIX) and the VDAX (EWG, DAX, DAX:IND), which measures volatility in German stocks, are far from extreme levels.
“The key will be an improved outlook on the political backdrop,” Matejka said. “We currently do not see the French risk as a game-changer for the region. The institutional framework is much stronger now than at the start of the euro crisis and the example of the recent Italian elections suggests the impact may be manageable for markets.”
He said these short-term risks may actually be mitigating longer-term risks.
French bond spreads over German government bonds have risen by 30 basis points, a level higher only since the extreme circumstances of 2011. So even if Macron wins, “we fear that, as the saying goes, things may have to get worse for them to get better. The RN[the far-right National Rally party]could win more votes than currently expected, and a potential new French government is likely to test the limits of its own capabilities.”
If that happens, financial markets may have to resist more aggressive fiscal easing, Matejka said.
However, heading into the second half of the year, this could be a good entry point to buy euro zone stocks and become overweight euro zone stocks relative to U.S. equities. Analysts also favor defensive stocks and are cautious on consumer and see banks (OTC:DJXSF) as increasingly vulnerable.
They are also maintaining an overweight to growth stocks over value stocks, as they believe their year-to-date performances of 14% in the U.S. and 7% in Europe will continue.
