“We see European stocks as big beneficiaries of the broadening global reflationary environment and believe investors are too skeptical of the region’s prospects,” Richard Turnill, Global Chief Investment Strategist for BlackRock, said in a research note, pointing out that BlackRock upgraded its view on European equities.
The European economies is expected to enjoy earnings growth in the year ahead from cyclical sectors that benefit from improved global growth and a weakening euro currency. Europe will likely benefit from increased trade as the U.S. led bout of reflation helps bolster stronger growth outlooks globally.
“We believe European equities should benefit in such a reflation scenario, absent any other shocks,” Turnill said. “European earnings have historically been more sensitive to global economy pick-ups than U.S. counterparts, given European firms’ lower margins and large revenue exposure to global and emerging markets.”
However, economic and political risks have kept investors from pushing too heavily into European markets, with most favoring the more stable U.S. stocks for their risk-on needs, which may leave opportunities in the undervalued European equities.
“We believe the political risk priced into European markets around upcoming French and German elections is overstated,” Turnill said.