In its quarterly Market Barometer, BlackRock’s European equity team looks at four factors: corporate earnings outlook, valuation, investor positioning and macro factors.
The team’s outlook for both valuations and investor positioning is optimistic at the start of Q1, while its outlook for both corporate earnings and macro factors is negative – albeit improved from last quarter’s.
Nigel Bolton, head of BlackRock’s European equity team, said: "Valuation, as we have always said, is never enough to support a stock or market in the short term, but on a long-term view it can offer significant opportunities.
"Europe continues to offer the cheapest valuations of all the developed equity regions and we believe the current valuations provide attractive entry levels for long-term investors who are prepared to tolerate shorter-term volatility."
Combined with the fact global asset allocators have reduced their weighting to Europe over the past five years, and are now sitting at very low levels, Bolton said he is starting to view such extreme positioning as a contra-indicator.
"We monitor investor positioning at the sector level as part of our investment process. We believe that investor positioning accompanied by valuation was one reason why Europe outperformed emerging markets, where global investors are overweight, in 2011."
He admitted the economic environment in Europe the first half of 2012 is likely to deteriorate, but added this would not surprise investors who have already priced that in.
"The surprise would be if global growth proves stronger than expected and coupled with a weaker euro provides a stronger boost to European growth," he concluded.
