Morgan Stanley Research Europe published an investment report today, May 6th, highlighting the relatively low valuations of European large cap stocks and arguing that large caps were likely to benefit from both improving macroeconomic conditions and sector rotation out of smaller cap stocks.
MS analysts Graham Stecker et al. make a strong bull case for larger Euro equities over the next few quarters, and filter this group of equities through a series of financial metrics to produce a pool of promising investment candidates.
Record low relative valuations for Euro large caps
The report highlights that European large caps are trading at 30-year relative valuation lows to the overall market on a P/BV basis, and are approaching 30-year highs on relative dividend yield. The relative normalised P/E of Euro large caps as a group just recently hit record lows, and Stecker and colleagues point out that the current 30% discount is similar to the premium in 2000 at the structural peak for large caps.
Time for sentiment reversal
The other leg of the analysts bull thesis on European large cap stocks is that the sentiment on the sector has been too negative for too long and it’s time for the worm to turn. “We believe large-caps are a significant consensus underweight across both long-only investors and hedge funds. Recent ETF flows have strongly favoured mid and small-caps and the average sell-side analyst rating is considerably more bullish on this area of the market than it is for large-caps.”
Selected European large cap stocks
The MS analysts screened European large cap stocks for those on their current Overweight list and who had a single-digit normalized P/E. The list included ING Groep NV (ADR) (NYSE:ING), Commerzbank AG (ADR) (OTCMKTS:CRZBY) (ETR:CBK), Orange SA (ADR) (NYSE:ORAN) (EPA:ORA), BHP Billiton Limited (ADR) (NYSE:BHP) (LON:BLT), Enel S.p.A. (BIT:ENEL), Statoil ASA(ADR) (NYSE:STO), Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA) (BME:BBVA), Total SA (ADR) (NYSE:TOT), Vodafone Group Plc (ADR) (NASDAQ:VOD) (LON:VOD) and Electricite de France SA (EPA:EDF).
Stecker et al also screened high growth-low valuation stocks on their Overweight list. Firms on this list include Renault SA (EPA:RNO), Shire PLC (ADR) (NASDAQ:SHPG) (LON:SHP), AEGON N.V. (ADR) (NYSE:AEG) (AMS:AGN), ING Groep NV (ADR) (NYSE:ING), Societe Generale SA (ADR) (OTCMKTS:SCGLY) (EPA:GLE), Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY), KBC Groep NV (EBR:KBC), Prudential plc (LON:PRU), BASF SE (ADR) (OTCMKTS:BASFY) (ETR:BAS), UBS AG (NYSE:UBS), Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA) (BME:BBVA), Schneider Electric SA (EPA:SU), SCA, Fresenius and Akzo Nobel N.V. (ADR) (OTCMKTS:AKZOY) (AMS:AKZA).
The report also screened for large Euro firms with the lowest P/BV. The MS Overweight-rated stocks on this list include Vodafone Group Plc (ADR) (NASDAQ:VOD) (LON:VOD), J Sainsbury plc (ADR) (OTCMKTS:JSAIY) (LON:SBRY), Commerzbank, Société Générale, ENEL, Aegon, Orange, AXA, ING, UniCredit SpA (BIT:UCG), EDF, DNB, BBVA, Statoil, Intesa, Renault and TOTAL.