By Sara Sjolin, MarketWatch
Europe, rather than the U.S. or emerging markets, will be the best place to invest in 2016, according to forecasts from top investment banks.
The region was marred by the trauma of the Greek debt crisis, fallout from China’s growth slowdown and the dramatic slump in commodity prices in 2015, but European equity markets still managed to outperform their stateside and emerging-market peers. That trend is set to continue into 2016, analysts say.
“We think euro-area equities have scope to outperform U.S. equities in 2016, on the back of stronger [earnings-per-share growth]…more attractive valuations and [foreign exchange] support,” strategists at Deutsche Bank said in a note.
“We like plays on the euro-area recovery that have not yet re-rated (banks, construction materials, staffing agencies) and beneficiaries from a further strengthening of the dollar (tech, pharma, airlines),” they added, saying stocks in those sectors don’t yet fully reflect economic improvement in the region.
Here are the five key things to know about the European stock markets as 2016 kicks off, according to forecasters.
The outlook: Stay overweight Europe in 2016
European stock markets broadly outperformed other regions in 2015, with the Stoxx Europe 600 index /zigman2/quotes/210599654/delayed XX:SXXP -0.52% up almost 8%. That compares to a 0.9% gain for the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.27% , a 4.4% slide for the MSCI Asia Pacific /zigman2/quotes/210598087/delayed XX:MS302000 +1.17% and a 13% slump for Brazil’s Bovespa index /zigman2/quotes/210597947/delayed BR:BVSP -1.03% .
Risk appetite is generally depressed and investors have little faith in the future, according to Barclays. But with earnings set to beat expectations and potentially more easing from the European Central Bank thought to boost credit growth, consumer confidence and spending, investors could still be in for a double-digit return from the European stock market.
Looking at outlooks from banks that forecast 2016 performance for the Stoxx Europe 600 index /zigman2/quotes/210599654/delayed XX:SXXP -0.52% , the pan-European benchmark could jump 12% in 2016. U.K. stocks are widely expected to underperform their European counterparts due to their heavy exposure to the embattled commodity sector.
|Year-end targets for the Stoxx Europe 600|
|Firm||Stoxx 600 target||Upside from current level*|
|* Closing level as of Dec. 28|
In comparison, the general feeling is to be underweight U.S. stocks as the diverging central-bank policies — the Fed tightening and the ECB easing — is likely to boost the dollar and depress earnings of U.S. companies doing business abroad, according to U.S. strategists, as laid out in MarketWatch’s 2016 Wall Street forecast story.
Earnings to the rescue
A common denominator in most 2016 European predictions is the positive outlook on earnings. The analysts have highest expectations for companies within the eurozone, forecasting that they will benefit from a weaker euro if the ECB continues easing as expected. A pickup in overall economic growth in the currency union is also expected to boost profits, making earnings one of the key drivers for a rise in the European stock markets.
“[In 2015], eurozone earnings managed to outperform U.S. earnings, for the first time in 5 years. One of our key views is that the gap between U.S. and eurozone earnings will keep closing next year, J.P. Morgan strategists write.
For the Stoxx 600, the bank expects EPS growth of 7.2%, while Deutsche Bank calls for overall EPS growth of 9%. Goldman’s Stoxx 600 EPS forecast is for 8%.
Barclays calls for earnings to jump 11% for Europe. “For those who find this unrealistic, we would point out that, excluding oils and materials, earnings are currently growing at 14% year-on-year,” the bank’s analysts said.
In the past, when earnings have beaten consensus estimates, European equities have typically produced a positive return, Barclays said, referencing the chart below:
Taking a contrarian view, Morgan Stanley predicts a lackluster year for European profits, with a puny 1% rise in earnings for the MSCI Europe /zigman2/quotes/216998573/delayed XX:990400 +2.36% . The downbeat outlook comes as the analysts forecast a depressing year for the commodity sector and little benefit from a weaker currency.
Sectors: Banks and consumers for the win
A weak euro, strong dollar, stronger economic growth and rising consumer confidence are the general themes investors need to consider when picking stocks for 2016 in Europe, analysts say.
Keeping those factors in mind, the analysts homed in on the sectors and companies below as the best investments in 2016.
Financials: The sector is seen as the best way to play the eurozone recovery and is currently looking cheap compared with other industries. Banks, in particular, are expected to benefit from higher bond yields in the eurozone on the back of rising inflation expectations and improved economic growth.
Among companies that fit the bill: