Investing.com – Investors should be wary of catch-up trades in European stocks as the divergence in economic activity between the U.S. and the eurozone is unlikely to close, according to JPMorgan.
Eurozone stocks are once again lagging behind the U.S. and have been flat for the past six months, while the eurozone has gained 12%.
“Positioning is light and valuation spreads are widening, with forward P/E ratios of 22x for the US and 13x for the Eurozone, leading to a catch-up trade towards the end of the year, especially given recent Chinese stimulus. may want to look for it,” JPMorgan analysts said in an Oct. 14 note.
“Despite all this, we think eurozone stocks will continue to lag behind the US.”
Fundamentally, the new widening of the growth gap is one of the driving forces behind a more cautious stance in the euro area and the US, the US bank added.
Eurozone CESI may have bottomed out, but it continues to lag behind US CESI. Eurozone manufacturing and services PMIs are both lower than the US PMI, as is retail sales growth.
“Our economists expect real GDP growth in the euro area to be 1% in the coming quarters, compared to 1.7% in the US,” JPMorgan said.
Poor relative growth performance may result in continued revenue delays. Currently, revised EPS in both regions is negative, but it is likely to be weaker in the euro area.
This year's EPS growth forecast for the euro area continues to be revised downwards, and could end the year flat, below the 5% EPS growth forecast at the start of the year.
“It is not clear whether this situation will change soon,” the bank added.
China's stimulus announcements, likely over the weekend, will be helpful, but will focus on risk mitigation through the reallocation of existing resources, rather than additional stimulus for consumption or investment.
We therefore continue to advise a muted rebound for now, with further trade uncertainty looming that could hinder any improvement in sentiment.
U.S. banks maintain defensive asset allocations with overweight positions in euro area utilities, consumer staples, healthcare, communications, and real estate.
