Equity Strategy: What is needed for Eurozone to start outperforming again? We stay OW Growth vs Value

Speaker: Mislav Matejka, CFA - Head of Global Equity Strategy

The last positive spell for Eurozone was between Sept ’22 and May ’23, when it outperformed S&P500 by as much as 32%, in USD terms. We cut Eurozone to UW in early May of last year, and the question is what can help Eurozone to deliver another leg of outperformance. It certainly screens cheap vs the US, at a 15% greater discount than typical on a sector-neutral P/E metric, and is likely underowned, as seen in 40 weeks of outflows over the last year. A more constructive China backdrop would definitely be a help for Eurozone to take the lead. As MSCI China is down as much as 30% vs a year ago and is likely a fully consensus UW everywhere, the current short squeeze could continue for a bit longer. Having said that, from a fundamental standpoint, we remain bearish on the region, for now. Another factor is the style leadership. We stay OW Growth vs Value, a position we held through 2023. As long as the market stays narrow, Tech driven, the US is likely to have the upper hand vs Eurozone. We note that EPS revisions in Europe remain worse than in the US. Finally, USD direction matters. The Q4 USD downmove might be finishing as the Fed cuts might have been overdiscounted in the near term. If USD is bottoming out, it would be hard for Eurozone to work. Backtested, Eurozone was actually the worst-performing region in times of USD strength, and Japan was the best international market – Japan remains our key regional OW for 2024. What to buy/sell in Europe? From the negative side, we highlight: we are still UW Chemicals and UW Autos, as of Q4 UW Hotels and Airlines, and have in November turned bearish on Banks. On the buy side, we have OW Utilities, upgraded Healthcare in November. We double upgraded Real Estate to OW last October, and finally, we are still bullish Aerospace & Defense.

This podcast was recorded on 29 January 2024.

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