7 Reasons To Invest In Europe Now: Credit Suisse And BofA Merrill


Wall Street powerhouses Credit Suisse and Bank of America Merrill Lynch have both turned bullish on Europe.

Bearish sentiment has reached extremes and both believe this, among other reasons, presents a prime contrarian buying opportunity for successful investors .

Credit Suisse upgraded its view on European equities to a "benchmark" weighting with an overweight rating on European cyclicals, in particular media, hotels, software, autos and airlines.

"Our lead indicator points to improving domestic demand growth in the Euro-area," Credit Suisse analysts wrote in a client note Friday. "Euro-area macro surprises, having troughed in late April, have continued to recover and briefly turned positive in late June. After Japan, the Euro area has seen the biggest improvement in macro surprises since the end of April."

The Purchasing Manufacturers Index reached a two-year high and suggests the potential for 0.5% economic growth for Europe this year.

The Credit Suisse analysts upgraded France to benchmark while rating Germany and domestic Italy "overweight" and Spain "underweight."

"Italy, Spain and France are abnormally cheap," Credit Suisse wrote. Italy's price-to-book valuation relative to continental Europe hovers near an all-time low. Wall Street sell-side analysts' buy recommendations have hit a 10-year low while sell recommendations hang at 10-year highs, indicating a contrarian investing opportunity.

Bank of America Merrill's chief investment officer team highlighted seven reasons to buy eurozone stocks.

1. The region's economic activity is improving. "Since this April economic data in the eurozone have been above economists' very low expectations," BofA Merrill wrote in a report the week of July 8-12. "However, clearly growth in 2013 (and in 2014) is going to be lackluster."

2. The European Central Bank will continue to be accommodative with more easing, giving people greater access to credit at low interest rates. "While credit creation in the eurozone area will be slow to recover, we believe that we are past the worst of the credit squeeze as the contraction in bank lending begins to stabilize."

3. Financial stress remains below levels seen in the past few years. "With the sense that the eurozone sovereign debt crisis has been a rerun movie, we believe financial stress has moved to a 'known unknown,' with a lower shock factor on markets and economic activity."

4. Corporate earnings are recovering. Earnings are projected to rise 2.6% this year. "While earnings are still being downgraded in the area, however, it has often been a turn in the earnings revision ratio that has prompted better market performance."

5. Valuations are very attractive. "The MSCI Europe Index trades at 12-month price/forward earnings ratio of 11.6, a more than 20% discount from its 20-year average and a 20% discount to the U.S.

"Relative to bond markets, the current 12-month trailing dividend yield of 3.6% is nearly a full percent higher than the current yield on the 10-year U.S. Treasury note."

6. Negative investor sentiment presents a contrarian buy signal. "Eurozone equities remain unloved and under owned relative to the U.S. and Japan.

"When combined with the better macro data for the area, the underperformance of the region's equities could begin to reverse."

7. Eurozone stocks have historically outperformed when U.S. bond yields rise. "We continue to forecast gradually higher U.S. Treasury yields as the U.S. economy improves from current levels.

"Because U.S. economic growth pulls up European activity, the latter's equities should perform well."

New inflow into European funds totaled a scant $646 million so far this year, according to a Bank of America Merrill Lynch report released Friday.

Broad Europe ETFs And Year-To-Date Returns

1.Vanguard FTSE Europe ETF ( VGK ) 4.89%

2. SPDR DJ EURO STOXX 50 ETF ( FEZ ) 1.13%

3. iShares MSCI EMU Index Fund ( EZU ) 2.87%

4. iShares S&P Europe 350 Index Fund ( IEV ) 5.06%

5. First Trust Enhanced Europe 50 ETN ( FEEU ) n/a

6. SPDR DJ STOXX 50 ETF (FEU) 3.06%

7.First Trust Europe AlphaDEX Fund (FEP) 9.77%

8.WisdomTree Europe SmallCap Dividend Fund (DFE) 10.05%

9.First Trust STOXX European Select Dividend Index Fund (FDD) -2.60%

10. BLDRS Europe 100 ADR Index Fund (ADRU) 6.44%

Source: ETF Database

Follow Trang Ho on Twitter @IBD_THO .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: EZU , FEEU , FEZ , IEV , VGK

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