BlackRock Says Buy European Stocks as Investors ‘Too Skeptical’

  • Equities benefit from reflationary trend: BlackRock’s Turnill
  • EM debt cut to neutral because valuations “give us a pause"

BlackRock Strategist Sees Room to Grow in European Stocks

Seven months after downgrading European stocks to underweight amid heightened political uncertainty, BlackRock Inc. is calling the asset-class a buy.

Investors have become “too skeptical” on the region, while the risk priced into the upcoming German and French elections is “overstated,” BlackRock Chief Investment Strategist Richard Turnill wrote in a note Monday. This comes as the asset manager cut its view on emerging-markets debt to neutral amid rising valuations.

European stocks have lagged their U.S. peers as traders assigned a greater risk premium to the area whose two biggest nations -- Germany and France -- experience turbulent election campaigns. Turnill says investors are overly cautious and sees the asset class benefiting from a pickup in economic growth and inflation.

“We see European stocks as big beneficiaries of the broadening global reflationary environment and believe investors are too skeptical of the region’s prospects,” Turnill wrote. “European earnings have historically been more sensitive to global economy pick-ups than U.S. counterparts, given European firms’ lower margins and large revenue exposure to global and emerging markets.”

Here are a few highlights:

  • “We see long-term opportunities in EM bonds, but higher valuations give us pause today,” Turnill said.
  • The spread between developing dollar-denominated bonds and the U.S. Treasuries has narrowed to 315 points, the lowest since December 2014.
  • Earnings in the Stoxx Europe 600 Index companies are expected to grow 13 percent in 2017 after shrinking last year, according to data compiled by Bloomberg.
  • BlackRock downgraded European stocks to underweight in July. The Stoxx Europe 600 has gained 2.2 percent since mid-December, when the asset manager upgraded European equities to neutral.
  • European stocks lost 0.7 percent on Monday after French presidential candidate Marine Le Pen pledged over the weekend to take the country out of the currency bloc should she win.
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