Morgan Stanley says that despite its recommendations under-performing in Europe, the euro is heading lower and investors should consider those same recommendations to buy certain stocks.

MS euro dislocation

Euro is likely headed lower

Morgan Stanley’s stock basket of weaker European beneficiaries, as the stock picks are at a 5 year low relative to their price earnings, the company is nonetheless saying now is the time to move into these stocks as the Euro is likely headed lower.

The brokerage firms FX strategists are forecasting a lower euro currency relative to the dollar over the near term, with the currency pair trading at 1.20 within twelve months.  A deterioration in the euro, making the currency weak which could boost exports, “should be positive for European earnings and equity performance,” the letter noted.

MS euro

Every 10% fall in the euro benefits European stocks

Morgan Stanley’s rule of thumb on the matter notes that is that every 10 percent fall in the euro benefits European stocks earnings per share by 3-4 percent.

As a result, the firm is recommending investors purchase its basket of stocks that will benefit from a weaker euro, as it might be on a relative drawdown. Morgan Stanley notes that it might be an aberration that, while the euro fell recently, its basket of stocks that might benefit from such a fall did not benefit, calling the lack of correlation “very unusual.”

Morgan Stanley’s European research team, headed by Krupa Patel, says its basket of stock picks is experiencing positive earnings revisions and is a value on an earnings basis.  The research note essentially says the correlation should return to its normalized pattern, reverting to the mathematical mean.

MS euro stock pics


Stocks that have overweight ratings include: Accor SA (EPA:AC), Beiersdorf AG (ETR:BEI) (FRA:BEI), Danone SA (EPA:BN) (OTCMKTS:DANOY), Sanofi SA (ADR) (NYSE:SNY) (EPA:SAN), Total SA (ADR) (NYSE:TOT), BioMerieux SA (EPA:BIM), Fresenius SE & Co KGaA (ETR:FRE) (OTCMKTS:FSNUF), GDF Suez SA (EPA:GSZ) (OTCMKTS:GDFZY), Kering (EPA:KER) and Veritas.  The sectors that benefit from a weaker euro include Energy, Pharmaceuticals, Tech Hardware, Consumer Durables and Food & Beverage.  “These are likely to be among those most positively impacted by EUR weakness,” the report predicted. Sectors least impacted by the euro decline include real estate, retailing and utilities, which have the highest proportion of domestic exposure and hence are least sensitive to euro moves.

Citing recent work from their FX strategists, the Morgan Stanley report notes sentiment around European risk assets has weakened significantly in recent weeks, while on the macro front weak German manufacturing orders and recession in Italy further confirmed fears of a growth scare in the region.