Europe has been having a rough go lately. The continued multi-year Greek disaster continues to get worse and continues to cost other European countries, such as Germany, a lot of money that they are tired of handing out. While new bailout terms have been agreed to between Greece and its creditors, the Eurozone is not out of the woods just yet. The overall negative sentiment in Europe has left equity analysts with their least bullish rating on European stocks since 1995. In fact, according to Barclays, only 41% of the stocks in the STOXX 600 have buy ratings from analysts. This is below levels seen during the Great Recession and Tech Bubble.
Barclays sees stronger finish to 2015 for Europe's stocks
As of the publication of Barclay’s European Equity Strategy, we see that the STOXX 600 index is listed around 398. Barclays has a target price of 430 for the index to reach by the end of 2015, implying an 8% increase from currently levels, which is not too bad. Barclays is also forecasting an 8% increase in the FTSE 100 by year’s end, 11% increase from current levels for the CAC 40 by year’s end, and the DAX is forecast to rally 13% from current levels by the year’s end. As you can see, while forecasts and outlooks may be dismal for European equities, it appears we could be nearing a bottom, if Barclay’s analysis is correct. Ultimately, there is still a lot of uncertainty around Europe and whether or not Greece can commit to austerity programs this time around. However, based on Barclays’ estimates, it appears that they see the most return out of the DAX index, or German stocks.
Barclays recommends European financial stocks
On a sector-by-sector basis, Barclays recommends being “underweight” on consumer staples, health care, and utilities. This is mainly due to the fact that safety sectors command a higher valuation overall and therefore are more expensive than the general market. On the other hand, Barclays rates consumer discretionary, financials, industrials, information technology, materials and telecom stocks as “overweight” and energy sector as “equal weight”. The most interesting aspect of the sector recommendations is Barclays’ recommended weight within the portfolio versus the benchmark weight. Barclays recommends 31.6% weight going to financial sector, compared to 23.2% in the benchmark and certainly shows the bullishness in the sector.
Overall, European stocks have a lot of negative sentiment around them right now with the yet another Greek debt bailout and uneasiness between major European powers. European stocks do look enticing from a contrarian point of view being that sentiment is worse than 2000 and 2008. I believe this could be a bit of a mispricing in the market and over the next year we certainly could see a recovery from the Greek drama. This could be a contrarian buy signal.