✈️Europe-You Asked, and We Answered #2🚀

Good evening friends of Pika World. We received some questions on our outlook for the equity market since our rating of outperform for European stocks months ago. So it is time for us to re-cap and shares our perspective.

The question revolves around two scopes: why did Pika Word upgrade European Equities and its appeal.

🏄🏼‍♂️Stock market activity expected to rebound

September brings us another exciting month as summer comes to an end, and a rebound of trading activity brings different highlights to the market. It is also when investors think of their portfolio and position them towards the last lap towards the year-end.

While it is often a month of higher volatility, it is often a prelude to a robust last quarter, and we believe the same holds for European equities. Accordingly, we are optimistic in both scopes: absolute and relative terms. In addition, we observe cross-region analysis for the developed markets based on our review of readings, commentary and analysts’ perspectives of the region.

Below are 4 quick snacks to consider.

🥇#1: Growth outlook remains sound in Europe

The region is likely to see a higher GDP growth partly attributed to its recent emergence out of the pandemic crisis. The early cycle means more potential for outperformance relative to its global peers. The rebound in economic activity will likely provide a fertile ground for strong macroeconomic readings in the coming months.
The region’s estimation of a 7% earnings growth is somewhat conservative, and Pika World believes there is room for upside potential and positive surprise.

🥈#2: Valuations are undemanding

The valuation is at a low bottom level when compared to US stocks or European bonds. This is crucial, especially for investors who have European stocks and is exploring a possible re-allocation strategy. A logical comparison will be based on how much return an investor can achieve from domestic stock versus bond yield.
The real dividend yield on domestic stocks is around 3%, and a 10-year bond real yield is around -2%. Such a 5% differential tend to favour an allocation to stocks that are too tasty to ignore, perhaps.

🥉#3: Investors are under-allocating towards European Equities

As summer often results in lower trading activity, investors have generally pared down their risk exposure to the region and hedge fund has reduced their allocation to the region based on the futures market indication to a low level.

Therefore, any normalised inflow back to the region can provide an alluring gain on a risk-reward basis. While some analysts have avoided cyclical stocks during the May period (which coincides with a sharp fall-off in US stocks) partly due to rich valuation and few catalysts for higher growth, the situation now differs and prompt us to re-look at the cyclical sector in European markets.

A slight risk-loving attitude navigates us to initiate possible cyclical accumulation with our preference on sectors that have retracted strongly in recent months: automotive, material and energy sectors.

🎖#4: Financial stocks appear to be appetizing

Also, similar to the US sector, Pika World favours European banks as earning consensus of about 1% growth in 2022 looks to be undermining the growth prospect of the region.

Therefore, banks could benefit from a higher bond yield (given our assumption that ECB monetary easing is expected to reduce slowly, as discussed in our previous updates). Likewise, with ECB potential easing on capital return restriction, there is potential for a higher dividend payout. We have seen the rally in Singapore and US bank stocks after central banks remove the restriction of capital payout to shareholders.

We hope you enjoy this read. Thanks for the submission of questions, and Pika World looks forward to sharing more ideas with you.

Have a blessed evening.

Cheers,
Pika Nat