Italy’s Stock Exchange, the Borsa Italiana which is part of the London Stock Exchange Group Plc, stands in the Piazza Affari in Milan. (Photographer: Gianluca Colla/Bloomberg)

After $40 Billion Exit, Morgan Stanley Says Give Europe a Chance

(Bloomberg) -- No other region has suffered Europe’s massive outflows this year, and that’s exactly why Morgan Stanley says it’s time for investors to take a fresh look at these stocks.

“From a relative perspective, Europe (and European exposure) looks increasingly attractive,” Morgan Stanley strategists, led by Graham Secker, wrote in a report. “Having seen the largest outflows of any region over the last six months, Europe appears unloved and undervalued just as the growth newsflow starts to pick up.”

After $40 Billion Exit, Morgan Stanley Says Give Europe a Chance

Investors pulled money from European equity funds for the 25th consecutive week last week, bringing year-to-date outflows to $40 billion, according to Bank of America Merrill Lynch, which cited EPFR Global data. In contrast to U.S. equities, which have been seeing inflows, stocks in the region have suffered under trade and political concerns, with the Italian coalition government’s spending plans providing the latest cause of trader anxiety.

Morgan Stanley agrees that Italy poses the key risk to European markets right now, but says this threat is mostly priced into valuations.

Another reason Morgan Stanley is optimistic about European stocks is the rally it sees coming for value stocks into the end of the year, with few sectors better-placed than banks, a major slice of the Stoxx Europe 600 Index. The MSCI Europe Value Index is down 6 percent this year, compared to a gain of 2 percent for its growth-peer gauge.

“The underperformance and undervaluation of banks is getting extreme, despite the fact that some of the traditional factors that drive the sector are starting to improve,” the Morgan Stanley strategists said.

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