Credit Suisse Starts Liking European Equities More

Credit Suisse’s Andrew Garthwaite and team see European equities now as having more clarity. The team said that five of the tactical factors that led them to reduce the size of their Overweight bias in May have improved. Europe’s sector-adjusted price-to-earnings (P/E) ratio is now shown to be the same as the United States, down from an 8% premium in early May.

Note however that Credit Suisse did outline several things that have not improved in Europe: speculative inflows are still high and speculators are still abnormally short the euro, and earnings revisions relative to global markets have peaked.

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Top factors driving the upgrade were as follows:

• PMI new orders are heading up, after their April pause (and consistent with 2% GDP growth versus 1.5% consensus).
• Bunds are now oversold rather than overbought.
• May and June are typically the worst months of the year for European equity performance.
• There are concerns about an overbought market ahead of Greek debt repayment deadlines in June.

In the call, Credit Suisse stuck with its Eurostoxx 50 target of 4,000 for year-end, while the current level is 3610.95. The firm also took its weighting in Europe to 19% from 17%. The firm thinks stocks are pricing in a 20% chance that Greece leaves the euro — a higher probability than what Credit Suisse actually sees. The report said of Greece:

We continue to see a very high probability of a temporary deal. Deposit outflows have now reached levels where weaker Greek banks are running out of collateral, and hence Syriza will likely have to compromise. We think even if there were a Grexit, there is only a one in three chance of a systemic crisis. Under such a scenario, France would be more vulnerable than investors realize (not least because French equities are trading on a near record P/E relative).

There is a SPDR exchange traded fund (ETF) for this: SPDR EURO STOXX 50 ETF (NYSEMKT: FEZ). The current index level of 3,610.95 implies upside of 10.77% to the 4,000.00 target. With that ETF trading at $39.16, Credit Suisse implies a year-end ETF price of $43.39 (versus a $39.17 close), without considering management fees, tracking error and any currency adjustments.

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