According to Morgan Stanley, European markets may lose their early-year momentum in the next three months, mainly due to weakening economic performance and further tightening of liquidity conditions.
We see cracks forming
– said the strategists.
Graham Secker, the head of the team, correctly predicted at the beginning of the year that European markets would outperform the US. He now expects that global economic growth is likely to slow significantly over the next few quarters, while European equity markets also face a strengthening US dollar, continued monetary tightening and liquidity problems.
The expectation of reduced liquidity stems from the US Treasury selling bonds to fill its coffers after the debt ceiling deal. This expectation is shared by other strategists, JP Morgan also warned about itthat it could be a blow to the stock market if investors use liquid funds to buy new bonds.
After rising almost 10 percent to the end of April this year, European stock markets lost strength in May, mainly due to concerns about inflation and a possible recession. During this period, European markets also underperformed the S&P 500 by the most in dollar terms since 2010, as the American benchmark was significantly boosted by a rally in shares of artificial intelligence companies.
Despite expecting weakness in the coming period, Secker remains positive on European equities in the longer term. According to his expectations, the summer downturn will be followed by a rebound, as valuations in Europe are lower compared to the USA, and the trend seen in company results also shows greater resilience. The strategist expects the MSCI Europe (local currency) index to end the year at 1,970 points, which means an increase of nearly 6 percent compared to Friday’s close.
In the analysis, Secker classified European banks and insurers from overweight to neutral, saying that the sector will be in a more unfavorable position during the economic downturn and the end of the interest rate hike cycle. In addition, the strategist changed his recommendation on pharmaceutical stocks to overweight, while food retail papers were raised from underweight to neutral. These adjustments reflect a more defensive stance for the coming months.
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