‘GOOD NEWS’ EXPECTED TO BOOST EUROPEAN STOCKS DESPITE GREXIT FEARS

European stocks have been hit hard by Grexit fears so far this month, but that only makes them more attractive, says Citigroup Global Markets.

Jonathan Stubbs, the U.S. bank’s equity strategist based in Europe, said earlier this month that the continent’s solid macro backdrop and improved earnings are expected to deliver returns of around 40 per cent over the next 18 months.

Stubbs has previously supported the re-rating of European equities based on worst-case risks, such as the eurozone breaking apart, not materializing. But his view now is supported by “good news” and better growth prospects that validate the opportunity to pick up yield in an era of low interest rates.

“This is the basis of our ‘double-up’ view for European returns in the coming 12-18 months,” the strategist said in a note to clients. “If there is growth then there is also further re-rating.”

Many investors consider European equities too expensive based on average price/earnings multiples, but Stubbs thinks this is wrong because the relationship between valuation and forward returns is only strong when forward returns are measured over multi-year horizons such as seven to 10 years.

“There is little relationship between spot valuation multiples and near-term returns, e.g. 1-3 years,” he said.

“So, if European equities deliver +40 per cent or -40 per cent returns over the next 12-18 months, it will not be because of the level of trailing P/E today, but will be because of events and net flows over this period in our view,” he said.