Morgan Stanley says Europe is at record lows versus the U.S. — and names the stocks to cash in

Published Tue, Nov 23 20212:20 AM ESTUpdated Tue, Nov 23 20212:21 AM EST

Equity strategists at Morgan Stanley have said European equities are trading at record lows compared to the U.S. and named a raft of stocks set to outperform next year. "After 18 months of serene progress, we expect equity performance to become more volatile over the next 12 months as the recovery matures and policy support fades," Morgan Stanley strategists, led by Graham Secker, noted on Nov. 14. "However, we still see 8% upside for MSCI Europe and believe that investor sentiment remains quite muted despite global markets at record highs." The bank's positive outlook for European equities comes as its projects "strong GDP growth" of 4.6% for the region in 2022, alongside "easier" monetary and fiscal policies relative to its peers. The strategists added that European equities are at a "record valuation low" compared to U.S. stocks. "Higher real yields could finally unlock some rotation and favor Europe over the U.S.," they argued. Fundamentals too, remain attractive, with the bank forecasting earnings per share (EPS) growth of 10% for European stocks in 2022. Cheap stocks in focus Morgan Stanley screened for companies with low valuations relative to the U.S. and projected EPS growth of more than 10% in 2022. Its resulting list includes French automotive supplier Valeo , Belgian Insurance firm Ageas , French train rail manufacturer Alstom and British food processor Associated British Foods . French supermarket retailer Carrefour , French energy company EDF and Italian oil major ENI are also favored by the analysts. All of the stock are rated overweight by the bank. Cyclical focus In addition, investors could also position themselves in cyclical stocks, the analysts said. Cyclical stocks tend to move in line with the economy. "A macro backdrop of strong nominal growth and rising US bond yields should provide a favorable backdrop for cyclicals over defensives," they added. Moreover, given European cyclicals' exposure to China, they are expected to see "renewed outperformance" through the first quarter of 2022 as investor sentiment in China picks up, the strategists argued. The bank's screen of "cheap" stocks in cyclical sectors include British automotive marketplace Auto Trader , British defense company BAE Systems , British real estate developer Barratt Developments and French industrial conglomerate Bouygues . German auto maker Daimler , French aircraft manufacturer Dassault Aviation and Swedish manufacturing firm SKF also made the list. Amid lingering concerns over stagflation, Morgan Stanley also compiled a list of "cheap" defensive stocks that are expected to "lead the market" if stagflation does come to pass. This list of stocks includes pharmaceutical companies Bayer and Novartis , supermarket chains Tesco and Colruyt and French utility company Engie . Other names on the list include British consumer goods firm Reckitt Benckiser , British utility National Grid and telecommunications firm Vodafone .

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Equity strategists at Morgan Stanley have said European equities are trading at record lows compared to the U.S. and named a raft of stocks set to outperform next year.