According to a February 16th report from Morgan Stanley Research Europe, the European economy is on the brink of a recovery and Euro stocks are set for a strong performance as equity analysts retool their models and start issuing upgrades.

MS analyst Matthew Garman and colleagues suggest that: “After four years of persistent growth disappointment, we believe that Europe is on the verge of an upgrade cycle. European net earnings revisions have been in negative territory since March 2011. Over the next couple of months we believe this series is likely to move into positive territory as analysts adjust their forecasts for the significant  moves we’ve seen in FX, rates and the oil price.”

European economy improving

European Stocks

The MS report highlights the recent notable improvement in the strength of European macro data. As can be seen in Exhibit 1, the  eurozone economic surprise index has moved positive, and is currently at a 16-month high in absolute terms, and at a two-year high relative to the G10. Moreover, eurozone retail sales are growing at their fastest rate in the last eight years. Garman et al. also point to a weaker euro supporting European economic data. They point to German manufacturing orders that were up 4% in January month-over-month driven primarily by foreign orders as well as Friday’s strong GDP figures

European Stocks

European Stocks

European GDP was up 0.3% last quarter against consensus expectations of a 0.2% gain. Germany was especially strong, growing at 0.7% in the fourth quarter, up from 0.1%Q in the third quarter. The analysts argue that the strength in the GDP data is “significant not only for confirming an improvement in economic momentum, but because the run-rate in quarterly GDP growth in 4Q is particularly important for the full-year estimate of the following year. All else equal, the stronger growth rate in 4Q is likely to place upward pressure on GDP forecasts for 2015.”

European Stocks

Also of note, the fourth quarter earnings season has been reasonably strong to date. The median stock surpassed consensus EPS estimates by 1.3%, and 7% more companies beat EPS estimates than missed.

European stocks where consensus estimates are low

European Stocks

Garman and colleagues filter their European stocks coverage universe through software models designed to identify stocks where “consensus estimates appear low most frequently across sales growth, operating margins and EPS growth in the context of their own history and relative to their peers.”

They note that Wm Morrison Supermarkets (consumer staples) is the firm where consensus estimates appear low most frequently. BP (energy) comes in second place, OMV (energy) in third, Subsea 7 (energy) in fourth and Sky (consumer discretionary) fifth place on the MS consensus estimates appear low most frequently list.

European stocks where consensus estimates are high

European Stocks

The MS team also filter their European stocks coverage universe through models designed to identify stocks where “consensus estimates appear high most frequently across sales growth, operating margins and EPS growth in the context of their own history and relative to their peers.”

Coloplast A/S Class B (health care) is the company where consensus estimates appear high most frequently. Beverage maker Pernod Ricard (consumer staples) was ranked second on the list, Lundin Petroleum (energy) was third, Novozymes A/S Class B was fourth and Bayerishern Motoren Werke (consumer discretionary) fifth.

European Stocks