Merrill Lynch Says Markets `Overreacted' on European Sovereign Debt Crisis

Bank of America Merrill Lynch said markets have “overreacted” to the debt crisis in Europe and it expects a 10 percent gain in the region’s stocks by the end of this year.

“Recovery is on the way,” Bill O’Neill, chief investment officer for Europe, the Middle East and Africa, said in an interview in Istanbul today. “We like the core European markets, the export-led industries, particularly industrials based in Germany, Benelux, France.”

Europe’s benchmark Stoxx 600 Index has advanced 11 percent from its 2010 low on May 25 through yesterday as concern eased that indebted European nations from Greece to Portugal face a worsening debt crisis. The measure remains 5.9 percent below this year’s peak on April 15 on speculation tackling debt will damp economic growth, falling 0.8 percent today.

Leaders of the Group of 20 industrialized nations will meet June 26 to consider ways to reduce deficits and unprecedented levels of government debt without harming the global recovery.

Merrill favors continental Europe, the U.K. and emerging markets in Asia, and is “less confident” about the outlook for the U.S. and Japan, said O’Neill, who helps manage about $1.4 trillion.

Merrill’s holdings are “quite overweight” on European stocks, he said. “We are looking possibly for another 10 percent” gain, he said.

The euro fell for a second day, to $1.2270 as of 1:46 p.m. in London. Merrill forecasts the euro will weaken to $1.15 by the end of 2010 and to $1.10 by the end of 2011.

“After the recovery, we see the euro weakening again against the dollar,” said O’Neill. Company earnings in Europe will be “strengthened by the weakness of the euro” through 2011, he said.

To contact the reporter on this story: Seda Sezer in Istanbul at ssezer2@bloomberg.net.

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