A February 2nd Equity Strategy report from JPMorgan Cazenove reiterates its call to overweight European equities while underweighting US stocks in 2015 due to both the strong dollar and the endless liquidity from the Fed finally drying up.
Six reasons US stocks could underperform in 2015
JP Morgan Cazenove analyst Mislav Matejka and colleagues outline six reasons that US stocks are likely to underperform in 2015.
Reason number one is the Fed’s liquidity support will be ending in the second half of the year, and its balance sheet as a share of GDP is already decreasing. The second reason is that profit margins are at record highs, but there are early indications that costs (especially wages. see charts below) are moving up. The JPM analysts note: “It is not a stretch to see US earnings down this year, for the first time since ’08. Given that US is trading at 16.4x P/E, the high end of the range, this would not be a good combination.
Third, a stronger U.S. dollar is likely to be a continued headwind as it not going to weaken much if at all over the next few quarters. Fourth, although lower oil prices will help the top line of most businesses, there will be a lag. For now, lower oil prices are driving negative EPS revisions. Fifth, the analysts point out that “bullishness on the direction of US equities is fully consensus – not a single sell side house is calling for S&P 500 to be down this year, and that is coming after S&P 500 tripled from the ’09 lows and US stocks appear to be fully owned in global portfolios.” Sixth and finally, they note that “U.S. high-yield credit has rolled over, opening the gap with equities.”
Six reasons European stocks could outperform in 2015
Matejka et al. also outline six reasons that European stocks are likely to do well this year.
First, business activity appears to be bottoming out in the Eurozone. They note: “Our leading indicator – M1 – accelerated significantly further. It suggests that the recent pickup in Eurozone PMIs and in IFO is not a one off and it is now consistent with the PMI reading at 57 by mid year, which would be a 10-year high.” Moreover, the Eurozone credit cycle is also bottoming out as the demand for credit, the supply of credit and the price of credit are all moving up.
Second, the QE package announced by the ECB is similar to the Fed’s QEs. The ECB is expected to purchase bonds worth 11% of the EU’s GDP, compared to 12%, 6% and 10% for the three Fed QEs. The JOM analysts note that strong ECB actions are coming through when Eurozone’s activity is already troughing, thus “creating a sweet spot for the Eurozone risky assets.”
Third, the dropping Euro will be a significant tailwind for the region. Fourth, global investor positions are currently relatively low in Europe. Fifth, the P/E of the Eurozone relative to that of the U.S. has declined because of U.S. outperformance, but the story for 2015 will be Eurozone EPS outperforming US EPS. Sixth, Matejka and colleagues note that: “Eurozone earnings and ROEs have never been as depressed vs the US as they are now. We expect the gap between US and Eurozone earnings to start closing.”