UPDATE: European Strategists Stay Cautious For 2009
January 05 2009 - 1:42PM
Dow Jones News
By Sarah Turner
LONDON (Dow Jones) - After a dreadful time in 2008, European
stocks have started the new year on an upbeat note, but strategists
are cautious on when investors should start buying stocks in
earnest.
The Stoxx 600 has risen almost 5% in the first two sessions of
2009, taking back some ground lost in 2008 -- the worst year of its
history -- when it fell 46%.
A deteriorating global economy and an expected corresponding
drop in corporate earnings were behind the sharp fall in equity
prices last year.
The global economy is likely to contact further in 2009, but
strategists are considering whether equity prices have fallen
sharply enough to reflect the fact that earnings will slow or
fall.
"Last year was a bear market for prices. We see this as a bear
market for fundamentals," said European equity strategists at
Citigroup who can see current opportunities in European equity
markets.
"Unless the world economy is broken or deflation is to become
embedded, then we think that current prices offer investors the
opportunity to buy exposure to global GDP -- through European
equities -- on the cheap," they said.
Still, they believe there is no need for investors to take
excessive risk and continue to recommend investors buy large-cap
firms and companies with strong balance sheets. They also recommend
a portfolio tilt towards growth, quality and dividend
resilience.
Morgan Stanley equity strategists are cautious on European
equities for the time being.
"In bear markets, patience is the golden virtue, capital
preservation rules," they said, noting that fundamentals are not
close to trough levels and valuations are not outright cheap.
They recommend a defensive bias and prefer telecoms, consumer
discretionary and energy firms such as Telefonica (TEF), Roche
(RHHBY), BP (BP) and Nokia (NOK).
J.P. Morgan equity strategists also like European telecoms as
they believe that investors should focus on companies and sectors
that are capable of maintaining or increasing dividend payouts.
"With almost zero return on cash and record low yields on
government debt, investors are seeking other assets that can
provide stable income," they said.
Although they said that recent gains seen in equities could
continue for the next few weeks, a collapse in corporate earnings
and further hedge-fund redemptions are likely to spook investors
further out, they believe.
"2008 forces us to recognize the high uncertainty about the
outlook," they said.
The Citigroup strategists said that they believe one of the key
trades they think the market will be looking at in 2009 is when to
put the risk trade back on.
"For this to happen, the path of economic growth needs to be
more certain," they said.
The Morgan Stanley strategists said that next bull market for
European equities could start later in 2009 and that that they are
watching earnings, U.S. house prices and deleveraging for
signals.
"The next bull market could start one-to-two quarters ahead of
the trough in earnings or U.S. house prices," they said. The broker
expects earnings to fall by 43% by the end of 2009 and U.S. house
prices to trough in 2010.
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