JPMorgan Call to Buy Unloved Stocks Came Right Before Plunge
Wall Street Is Late to Stock Market Party Where Trouble Brews
(Bloomberg) -- Wall Street’s latest equity call might have come in a tad too late.
Strategists from JPMorgan Chase & Co. and Bank of America Corp. turned bullish on European stocks earlier this week, citing limited investor presence and optimism over economic growth. The timing couldn’t have been worse: the recommendations came right before a stream of troubling data put an end to the short-lived equity market rally, sending the regional benchmark to its worst drop since December.
First there was the news that the slump in manufacturing is deepening and inflation is slowing in the euro-area. Then the U.S. factory gauge posted the weakest reading since the end of the last recession and private-sector payrolls grew less than economists expected, signaling a serious threat to global growth and making it very hard for investors to trust hopeful analysts.
The rosy bet on European equities boils down to a call on the economy, and what unites stock bulls is their belief that the data are hitting lows and can only get better from current levels. It’s also a contrarian call on positioning, since European stocks are the world’s most popular short trade, with regional equity funds having lost $98 billion this year alone, the most among major markets.
But according to Max Kettner of HSBC Bank Plc, even low investor exposure can’t mask the fact that the European equity benchmark was trading near a 16-month high before Tuesday’s poor data. Fueled by a switch into cheaper, so-called value shares after a sell-off in bonds in September, the Stoxx Europe 600 rose 3.6% last month, double the return of the S&P 500.
“There’s definitely a disconnect. The disconnect between the macro data and what markets are pricing is the largest in Europe compared to other markets,” Kettner, a multi-asset strategist at HSBC, said in an interview. “We don’t like euro-zone stocks at all.” HSBC’s multi-asset team is overweight U.S. stocks instead.
The outperformance of European stocks against the U.S. didn’t go unnoticed, with JPMorgan strategists Mislav Matejka and Prabhav Bhadani on Monday going so far as to start recommending euro-zone equities over U.S. ones for the first time since May 2018. They point to the cheapness of pariah stocks as well as hopes that the resumption of the European Central Bank’s quantitative easing will boost manufacturing and other economic activity.
Europe is highly sensitive to the state of the U.S. economy, which explains why the decline in equities on Tuesday took a serious turn only after American factory orders came out, as poor euro-zone data was already priced in. Bank of America strategists led by Sebastian Raedler raised their Stoxx Europe 600 target on Monday, citing low U.S. recession risks, among other factors.
Equities continued their nosedive on Wednesday, with the Stoxx Europe 600 tumbling 2.7%, the biggest drop since December.
What could save European equities is the fact that political uncertainty in the U.S. is becoming almost as dramatic as in the U.K. and Italy, because of the impeachment inquiry against President Donald Trump. In the search for an alternative developed market, traders may seek out unloved European stocks.
“The sentiment is becoming at least a bit better toward European stocks,” said Ulrich Urbahn, head of multi-asset strategy and research at Joh Berenberg Gossler & Co. “Part of the story is also that policy uncertainty in the U.S. is rising now with the impeachment talks.”
--With assistance from Sid Verma.
To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net
To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, John Viljoen, Paul Jarvis
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