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
Credit Suisse upgraded its view on
to a "benchmark" weighting with an overweight rating on European
cyclicals, in particular media, hotels, software, autos and
"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
The Credit Suisse analysts upgraded France to benchmark while
rating Germany and domestic Italy "overweight" and Spain
"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
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
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
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
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
"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
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
"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.
And Year-To-Date Returns
1.Vanguard FTSE Europe ETF (
SPDR DJ EURO STOXX 50
MSCI EMU Index Fund (
iShares S&P Europe 350
Index Fund (
First Trust Enhanced Europe 50
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)
BLDRS Europe 100
ADR Index Fund (ADRU) 6.44%
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