The best start for European equities in 17 years has left at least one group unconvinced: stock analysts.
Those assessing the region’s companies are the most cautious in 25 years, according to Citigroup Inc. While their ratings have historically tracked the Stoxx Europe 600 Index, the current gap between their average recommendations and the gauge’s level has never been wider, according to Jonathan Stubbs, head of European and U.K. equity strategy at Citigroup.
“This ‘contrarian’ stance from analysts suggests that either they have broad fundamental concerns, e.g. valuation and/or growth,” London-based Stubbs wrote in a note dated Wednesday. “Or are struggling with a combination of excess liquidity, historically low interest rates and fast-moving markets.”
The European Central Bank introduced unprecedented stimulus measures this year, weakening the euro and helping push the Stoxx 600 up 19 percent. An exchange-traded fund that gives exposure to European stocks while hedging the currency has attracted the most money out of U.S.-listed funds this year. The Stoxx 600’s valuation surged 7.7 percent in the first quarter, the biggest jump in five quarters, according to Bloomberg data.
The rally is close to catching up with analysts’ price forecasts. The Stoxx 600 is trading at the highest level relative to individual price targets by analysts in at least 10 years, Bloomberg data going back that far shows. Since the end of last year, analysts have barely budged on their average consensus recommendations for Stoxx 600 companies.
Media and insurance are the two groups that analysts are most cautious on relative to the 25-year average, while ratings for auto-related companies and food and beverage stocks are the closest to their historical mean, according to Citigroup’s note.
The health-care sector is currently analysts’ favorite, rated on average 3.79 on a scale where 5 equates to a unanimous buy recommendation, according to Bloomberg data. Travel and auto shares are next, while retail and energy stocks have the lowest recommendations, the data show.
Stubbs reiterated his forecast for the Stoxx 600 to reach 550 by the end of December 2016, 35 percent higher than its close Wednesday, as economic growth and stock-multiple expansions fuel price gains.