A Citi Research European Portfolio Strategist report published yesterday suggests that the current pullback in European equity markets is a golden buying opportunity. Citi analyst Jonathon Stubbs highlights his belief that European markets could climb as much as 20% from here by year end 2014. He particularly focuses on the Euro banking and mining sector as likely to outperform over the next few quarters.
European market: Buying after pullback is perfect timing
Stubbs argues that this current more than 5% correction in the equities markets will work out much like the market corrections in mid-2012 and mid-2013, when the markets shrugged off the downdraft and moved up to new highs each time. He admits it can be difficult to time the “bottom”, but that the “bad things” that confronted the markets over the last couple of years (such as major bank system failures or Greece or Italy defaulting or leaving the EU) are no longer real concerns. Given today’s cheap money environment, this means that — barring a complete EM meltdown — a return to growth is highly likely over the next couple of quarters. In fact, Stubbs is calling for 10% across-the-board earnings growth in Euro equities in 2014.
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Citi Research recommendations
Citi Research is taking a firmly bullish stance in calling for around 20% return from European markets on 2014. Stubbs particularly prefers the banking, mining and travel & leisure sectors given strong revenue and earnings momentum. “We stay bullish and target c20% returns from UK and European equities in 2014 driven by: 1) higher global GDP growth, 2) recovering profit growth, and 3) capital flows to equity. Within equities, investors should focus on: 1) earnings momentum & REV, 2) re-leveraging optionality & GARP, and 3) surplus FCF. At a sector level, this suggests a preference for Financials & Cyclicals, eg Banks, Mining, Travel & Leisure, over Defensives, eg Food & Beverage, Telecoms, Oil & Gas, Utilities.”
Risks to bull thesis
The report also highlights a couple of potential risks to the Euro equities bull thesis. First, emerging markets, including economic giant China, are currently in turmoil, and there is a risk of the problem deepening and seriously impacting global growth. Stubbs says a real EM meltdown is quite unlikely, especially given the gradual, but steady structural reforms being seen in China and elsewhere in EM.
The second risk is interest rates going up too far too fast, especially if the pace of the Fed taper picks up significantly. He also dismisses this scenario as unlikely, and argues the Fed won’t raise rates until 2015.