From FT Alphaville:
Morgan Stanley strategist Teun Draaisma has thrown in the towel and closed his bearish underweight position on European equities.
Draaisma has been bearish since late January, when he downgraded in the expectation of a 10-15 per cent fall in stock prices.
He thinks we have now had the correction – the MSCI Europe index was down 13 per cent last Friday from its mid-April peak – and on a 12-month view its time to turn bullish.
We think it is possible that the correction is not fully over yet, and that the ECB may be pushed to do outright QE. But with the recent policy initiatives, and, as of Friday, 24% upside to our 1280 MSCI Europe target on a 12-month view, we’d rather be buyers then sellers.
Events have evolved rapidly. We expected strong growth leading to the start of tightening and struggling equities, just like in 1994 and 2004, with a tough H1 and a better H2. This ‘start of tightening’ moment is already over in EM, we believe, and with the sovereign crisis the start of US tightening may now happen much later, possibly not even in 2010. Therefore the theme has now become the European sovereign crisis – a containment of which would be followed by rapidly rising equity markets.
However, Draaisma says it is important to realise this is a “cyclical” bull market…… because the secular bear market, a theme followers of Soc Gen’s Albert Edwards will be familar with, is not over....MORE
We think we are in a cyclical bull market for equities, because we are optimistic on earnings growth, driven by EM, US and corporates.
We are bearish on European GDP growth, especially in the periphery, but European earnings are a play on global growth. We recognize there is a risk that the cyclical bull market has ended, if the sovereign crisis leads to a double-dip for European earnings next year. This is not our current view, and our EGLI (earnings growth leading indicator) is predicting 59% earnings growth for the next 12 months, while MSCI Europe now trades on 10x 2011 IBES PE. Our target of 1280 implies 20% upside and 13x PE, 10% below the long-term average of 14.5x. We view this correction as a buying opportunity.
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