Bullish on Europe? Don’t ignore the risks

Markets aren't pricing in risks: Pro
Markets aren't pricing in risks: Pro   

Things are certainly looking up for Europe's economy and with hefty monetary stimulus it's no surprise that stock markets in the region are on a tear.

Yet for some strategists the level of complacency in markets is a source of worry and some major risks are being overlooked. These include the fallout from conflict in Ukraine and Greece, which is under intense pressure to find cash to meet looming debt-service payments.

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"Ukraine is something that people are just not pricing into the markets. There are many worries that markets are just not pricing in at all -- Greece is another one," UBS Global Asset Allocation Strategist, Ramin Nakisa, told CNBC Europe's "Squawk Box" Tuesday.

"We're above our year-end target for the STOXX 600, which was 380, and markets are pricing in very little risk."

The DAX displayed on an electronic board at the Frankfurt Stock Exchange, Germany, on March 9, 2015.
Martin Leissl | Bloomberg | Getty Images
The DAX displayed on an electronic board at the Frankfurt Stock Exchange, Germany, on March 9, 2015.

The pan-European Euro Stoxx 600 index was trading at about 393.50 on Tuesday, hovering close to last week's peak which was its highest level since 2007.

The index has soared some 30 percent from a low in mid-October, as backdrop of quantitative easing (QE) from the European Central Bank, a weak euro and a drop in oil prices boosts the outlook for regional stock markets that have long lagged their U.S. peers.

According to Citigroup, European equities could surge as much as 70 percent by the end of 2016.

Read MoreStocks here may surge 70% by end-2016

"European markets have three major elements in their favour which will sail their ship in the coming quarter. Firstly, you have a lower euro, secondly falling oil prices and finally ECB QE. So the odds are really stacked in their corner and we think a 40 percent gain could be possible," Naeem Aslam, chief market analyst at AvaTrade, told CNBC.

"Yes, we have headwinds from Greece … Nevertheless, things are moving forward and we anticipate at the end of the day it will be all resolved," he added.

However Nakisa at UBS said that while "structurally" he was positive on European stock markets, current price levels did not reflect risk adequately.

"It's the complacency that worries me. Look at the options market – in the U.S. people are buying puts, they are starting to get nervous," he said. Those who purchase put options think the asset will go down in price.

"In Europe, we're not seeing that skew, we're not seeing that volatility that I think we should be seeing."

Michael Hewson, chief market analyst at CMC Markets in London, added that the euphoria over the introduction of monetary stimulus in the euro zone meant other factors were being overlooked.

"There is a perception that QE and a weak euro will cure all ills. We still don't know if Greece can be resolved and there are still concerns about the banking sector in Europe," he told CNBC.

"So while you could argue that European stocks could go higher, there is potential for a correction in the (German) Dax (index) and broader European stocks."

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