European Stock Bulls Keep Calm Even as Threats Surface

(Bloomberg) -- Don't give up on European equities.

That's the message from firms including RBC Wealth Management, which has maintained its overweight rating on continental European stocks even as the region's benchmark gauge has lagged its U.S. peer this year. Although trade tensions between the U.S. and China continue to rattle global markets, bulls say European equities' cheap prices and solid profit momentum can underpin stock gains.

“We expect the earnings story and the valuation story to attract investors to Europe going forward,” Frédérique Carrier, a managing director and head of investment strategy at the $510 billion wealth manager, said by phone from London. She finds the consensus profit growth estimate of about 11 percent for the Stoxx Europe 600 Index in 2018 “achievable.”

A strengthening euro, which harms Europe's exporters, and weakening economic momentum have clouded the outlook for the region's stocks in recent months. The Stoxx 600 price return between January and March was the worst of any quarter in two years. Deutsche Bank has cautioned that cyclical sectors like banks, automakers and miners will bear the brunt of the slowdown in the pace of growth in Europe and globally.

For Carrier, however, the market still offers bright spots, including the potential for positive operating leverage to support earnings. European company profits depend more on sales volume relative to peers elsewhere, given their higher fixed costs. That means top-line growth can benefit more easily from a boost in economic activity.

German factory orders rebounded in February, data on Thursday showed. The country's central bank says the economy probably maintained its momentum in the first quarter as companies work through their order books.

If history holds, European stocks are ripe for a rebound from their 7.4 percent drop since late January, according to Bloomberg Intelligence strategists Laurent Douillet and Tim Craighead. They argue that the recent pullback has lowered the market's valuation to a “less extended level,” an opinion shared by Morgan Stanley.

“Focus is understandably on protectionist trade rhetoric and currency, but we believe underlying revenue and earnings fundamentals are still sound,” Douillet and Craighead wrote in a note this week.

--With assistance from Blaise Robinson

To contact the reporter on this story: Aleksandra Gjorgievska in London at agjorgievska@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Brian Lysaght

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