Lousy European Data Mean It's Time to Buy Stocks, for Citigroup

(Bloomberg) -- Europe’s economic data haven’t been this disappointing since 2012, and that’s a great buy-signal for the region’s stocks -- according to Citigroup Inc., at least.

While a tumble in Citigroup’s euro-zone economic surprise index -- reflecting indicators coming in weaker than analysts had anticipated -- could suggest an impending end to the economic expansion, that’s not how the bank’s equity strategists are reading it.

What’s key is that the index, down almost to -90, is now at levels that historically presage gains in stocks, Citigroup strategist Jonathan Stubbs wrote in a note to clients Wednesday. The average one-year return for the euro region’s Stoxx 600 Index is about 20 percent following breaches in the surprise gauge past -70, Stubbs’s analysis shows.

Lousy European Data Mean It's Time to Buy Stocks, for Citigroup

The call is similar to the theory that when everyone turns bearish, that’s the time to get into stocks because pervading gloom means further downside is limited. Citigroup’s take on the drop in the surprise index is that it’s partly driven by surveys of sentiment -- rather than real activity -- coming off of high levels, and that it reflects concerns about trade tensions and recent weather events, rather than major underlying worries.

“A fall below the -70 level has been a strong buy signal for investors over the last 15 years, with one exception: 2008,” Stubbs wrote. Investors should "raise exposure or go overweight cyclicals, financials, value and high-risk stocks,” he said.

Lousy European Data Mean It's Time to Buy Stocks, for Citigroup

The exception was a big one -- back during the worst year of the global financial crisis, when the index fell below -70, stocks declined about 33 percent over the next 12 months, according to Bloomberg calculations. But 14 times out of 15, slumps in the index have proved a buying opportunity, Stubbs says.

Europe: Ground Zero for Markets’ Global Growth Test

European equities are also “reasonably attractive” on a dividend-yield basis. Consensus expectations of 10 percent earnings growth in 2018, and slightly less in 2019, are “both plenty to support dividend growth and higher share prices,” Stubbs said.

©2018 Bloomberg L.P.