Graham Secker: Re-engaging with Cyclical Value in Europe
Thoughts on the Market
Morgan Stanley
4.8 • 1.4K Ratings
🗓️ 14 September 2021
⏱️ 4 minutes
🧾️ Download transcript
Summary
With the summer growth scare in Europe possibly nearing an end—and relatively inexpensive valuations—cyclical stocks in Energy, Banking and Autos may be worth a fresh look.
Transcript
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| 0:00.0 | Welcome to Thoughts on the Market. I'm Graham Secker, Morgan Stanley's chief European |
| 0:06.5 | and UK equity strategist. Along with my colleagues bringing you a variety of perspectives, I'll |
| 0:11.4 | be talking about our latest thoughts on European equities and our preference for owning cyclical |
| 0:15.6 | value companies into year end. It's Tuesday, September the 14th at 2pm in London. |
| 0:22.4 | September is always a busy and interesting time in markets, as capital market activity rebounds, |
| 0:27.7 | poster summer lull, and investors consider how best to position their portfolios into year end. |
| 0:32.8 | While this month can sometimes produce a brief period of higher volatility, it tends to set the |
| 0:37.6 | scene for solid returns in the final quarter, and we see a similar outcome for European equities |
| 0:42.4 | this time too. Our optimism on European stocks, both in absolute terms and relative to global |
| 0:48.0 | peers, is predicated on three pillars. First, the growth fundamentals in Europe continue to look |
| 0:53.0 | favourable, with the region likely to be a GDP outformer in 2022, given it is earlier in its |
| 0:58.7 | recovery than the other regions, and hence offers a greater rebound potential. We also see upside |
| 1:04.0 | risk to consensus earnings forecasts for next year, as the current estimate of just 7% growth |
| 1:09.0 | looks too low to us. If you go back to the start of every September over each of the last 30 years, |
| 1:14.5 | you find that earnings forecasts for the following year have never been this low before. |
| 1:18.6 | For us, such low expectations are a positive, not a negative factor, as they provide greater |
| 1:23.6 | potential for profit upgrades in the weeks and months ahead. A second factor in favour of European |
| 1:28.8 | stocks is their valuation, which is close to a record low versus either US stocks or European bonds. |
| 1:35.2 | The latter comparative is particularly relevant if you are a European asset allocator, |
| 1:39.4 | facing a choice between a real dividend yield on domestic stocks of plus 3%, or a real yield |
| 1:44.9 | on 10-year bonds of minus 2%. This 500 basis point real yield advantage for stocks is close to a |
| 1:51.1 | record high. Third, we think global investors remain significantly underweight Europe in their |
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