“We have raised our European equity to an overweight from neutral and cut the US to a full underweight. Emerging markets are maintained at benchmark weight,” said Luca Paolini, chief strategist.
“European equities are upgraded to reflect the region’s increased economic momentum, improving liquidity conditions and favourable valuations, as adjusted over the business cycle,” he added.
Paolini said the improvement in the economic picture has largely been due to the combined effect of a weaker euro and lower oil prices. Also, manufacturing surveys point to stronger activity and private consumption has also been on the rise, he noted.
Despite the reasons for optimism, Paolini does acknowledge that an adverse outcome to the debt negotiations between Greece and its creditors remains a risk, although he expects a compromise to be reached eventually.
The ECB QE programme should also support valuations, according to Paolini. “The ECB’s expansion of its asset purchase programme to government bonds unveiled on 22 January went further than many had thought,” he said.
Another factor in this decision is how European stocks look in relative terms, with Paolini having concerns about other parts of the world.
“The US market looks more vulnerable. The region’s stocks are the most richly valued on our scorecard, and this poses risks, particularly as the Fed is about to raise interest rates. The earnings season has been lacklustre and the strong dollar could start to bite into US companies’ margins,” he noted.
