When European equity strategists at the world’s largest investment banks forecast a rally in 2011, UniCredit SpA’s Tammo Greetfeld said they were wrong. He was vindicated as stocks tumbled the most in three years.
He now predicts that the Euro Stoxx 50 Index will climb to 2,700 by the end of 2012, a 16 percent surge from current levels, as the economy and company earnings improve. That is triple the average projection for a 5.7 percent gain from 17 strategists polled by Bloomberg News.
While at the end of 2010 counterparts from Goldman Sachs Group Inc. to JPMorgan Chase & Co. were calling for a mean 12 percent rally in stocks, the Euro Stoxx 50 ended the year 17 percent lower as the region’s sovereign-debt crisis worsened, sending borrowing costs in Spain and Italy to euro-era records. The gauge posted its best first quarter since 2006 this year as U.S. economic data topped estimates and the European Central Bank lent $1.3 trillion to financial institutions in the region.
“Life is easier within the crowd than outside,” Greetfeld, 47, said in a phone interview from his office in Munich on April 5. “But of course, in the end, the most important thing is to be as close to reality as possible. Emotionally it is easier to maintain a positive out-of-consensus opinion than to stick to a cautious out-of-consensus view.”
Greetfeld is returning from a four-month hiatus after a record third-quarter loss at Milan-based UniCredit forced Italy’s biggest bank to reduce costs by closing its western European cash-equities business and cutting jobs, restricting its research output. He joined a new cross-asset strategy team after UniCredit fired 130 people in sales, trading and research in November.
The Euro Stoxx 50 climbed 3.3 percent this year through last week while the Standard & Poor’s 500 Index of U.S. shares rallied 11 percent. The gains will probably continue as the ECB’s three-year lending program, known as the longer-term refinancing operation, boosts demand for stocks, U.S. economic data continue to improve and analyst estimates for company earnings turn positive, the strategist said.
The Euro Stoxx 50 dropped 3 percent to 2,321.53 at the close of trading in London today, the lowest in three months, after a report on April 6 showed U.S. employers added fewer jobs than forecast in March.
Greetfeld, who has worked in investment bank research for 20 years and wrote his economics PhD thesis on the credibility and sustainability of the European monetary union, continues to caution his clients on the risks emanating from the region’s debt crisis. Investors should favor German stocks and shun those in Spain to take advantage of a divergence in economic and earnings growth across Europe, he said.
The DAXK Index, a German equities gauge that strips out gains from dividends, has soared 14 percent in 2012 while Spain’s IBEX 35 has slid 11 percent. The Iberian nation’s economy will shrink 1.2 percent this year, according to a Bloomberg survey of economists. That compares with forecasts for a 0.7 percent expansion of the German economy.
“The German equity market is our favorite among the euro-zone equity markets,” Greetfeld said. “It has a better relative earnings trend.”
Debt Crisis Uncertainty
At the end of 2010, he said equity investors would face “major uncertainty” from the euro-area debt crisis and “uncharted territory” in U.S. monetary policy during 2011. He gave a 2011 year-end index target for the Euro Stoxx 50 of 2,900, which implied a 4.2 percent gain. By Feb. 24, 2011, when Bloomberg polled 12 bank strategists, UniCredit’s target signaled a loss for the year of 1.9 percent, the only negative prediction. The average in the survey, including his forecast, was for a gain of 8.2 percent.
“From early on, we had a theme,” said Greetfeld. “This crisis is not just like a short-term crisis that occupies markets, then everything goes back to normal immediately. But rather that this would be a crisis that would change many factors that impact the euro-zone equity markets in a more structural and longer lasting way.”
Morgan Stanley’s Graham Secker and Ronan Carr have taken Greetfeld’s place as the most bearish strategists this year. European stocks may tumble 7 percent through December as governments and banks cut debt and policy makers fail to offset a slowdown in growth, they said last November. Morgan Stanley hasn’t reviewed that call even after the Euro Stoxx 50 climbed this year.
‘Poor Man’s Easing’
“What surprised us was that the ECB had a significant change of heart and the LTRO, which we thought was a poor man’s quantitative easing, was perceived to be much stronger than we anticipated,” Secker said in a phone interview from London on April 3. “We may need to raise our target, but we’ve taken the view that the economic growth outlook is still not supportive of risk assets and liquidity injections will prove temporary support rather than something more sustainable.”
The market is also moving in an opposite direction to that forecast by Gerald Moser at Goldman Sachs on Jan. 13. He predicted that stocks in Europe would slump 10 percent as the region’s debt crisis harms the economy, before recovering in the second half of 2012.
Goldman Sachs Forecasts
Moser advised holding fewer financial shares than are represented in benchmark gauges just as the Stoxx Europe 600 Banks Index began an 11 percent rally through the start of April. That was 5 percentage points more than the Euro Stoxx 50 during that period. Goldman Sachs declined requests from Bloomberg News for an interview with someone in its equity-strategy team.
The average of 2012 year-end forecasts for European indexes from 17 banks and brokerages on March 21 implies a 4.4 percent advance from today’s levels, according to a Bloomberg News poll. Five of the estimates, including those from Morgan Stanley, Societe Generale SA and Exane BNP Paribas, call for losses.
The rally this year has pushed the price-earnings ratio on the Euro Stoxx 50 to 9.4 times estimated earnings, Bloomberg data show. That’s still 11 percent below its five-year average. Estimates for full-year earnings on the gauge increased last week for the first time in 2012, estimates compiled by Bloomberg show.
“2012 should be a positive year for equities and we focus on the question of how to benefit from the chances without losing sight of the risks,” Greetfeld said. “If we look through to the end of 2012 and take into account the positive UniCredit GDP outlook for the global growth environment, then this clearly argues for a positive year for the euro-zone equity market.”