Barclays shifts faith from US to European stocks for 2020

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Barclays has rebalanced its equity focus away from the U.S. and toward Europe and emerging markets for 2020.

In its 2020 outlook, published Wednesday, the British lender said it expects European equities to deliver further gains, setting a target for the Stoxx 600 of 430 by the end of 2020, up 6% from Wednesday’s open.

The rise is expected to be more moderate than in 2019, and Barclays analysts identified a late-stage business cycle, overbought technicals and normalized valuations as possible risks to European stock performance.

However, a blend of light positioning, an improving macroeconomic environment and financial conditions, a mild earnings recovery and attractive valuations points to an extension of the current equity bull market, the report projected.

“Europe has marginally underperformed the U.S. year-to-date, but has closed some of the performance gap recently,” Emmanuel Cau, Barclays head of European equity strategy, wrote in the strategy report.

“For 2020, we believe that Europe and U.S. equities offer broadly similar upside, but we see the balance of risks around our constructive macro scenario consistent with a tactical preference for Europe vs. the U.S. We find current European equity valuations attractive compared to the U.S.,” he added.

Both regions have re-rated this year, but the U.S., more so than Europe, and Cau suggested investors’ jitters over value stocks, particularly financials, in recent years likely explains their flight from European equities, which has meant most equity traders are overweight the U.S. and underweight Europe and emerging markets.

“Beyond the weaker macro and earnings fundamentals of Europe, we believe that a lot of the negativity on Europe is due to policy uncertainty, Brexit, trade friction in particular and the drag from the Chinese deleveraging,” Cau said.

“Outflows from European and U.K. dedicated equity funds started in earnest just after the EU referendum in June 2016, while U.S. outflows started later when the global economy rolled over.”

If the political deadlock between the U.K. and the EU was to end in 2020, Barclays anticipates that global investors could flock back into both equity markets.

Barclays strategists are forecasting similar mid-single digit gains for U.S. and European equities, with global growth showing a mild rebound and accommodative central bank policy leading to modest growth in earnings-per-share and a mild expansion of valuations.

“However, given their higher exposure to EM (emerging markets), we think European equities offer optionality to higher EM growth than what is already priced into our baseline. In addition, modestly cheaper valuations, underweights by institutional managers and divergent political risks could offer some support to European equities,” Cau concluded.

As of Thursday morning, the Stoxx 600 is up around 21.1% since the turn of 2019, while the S&P 500 is up around 25.8%.

Sector focus

The outlook also featured some key shifts in sector weightings. Barclays has upgraded auto stocks from middleweight to overweight on the back of a more benign macro outlook and PMI (purchasing managers’ index) data bottoming out.

Semiconductors were upgraded from middleweight to overweight due to the “cycle turning positive” and resilient final demand, while luxury goods received the same upgrade due to resilient high-end consumer demand despite expensive valuations, and the weak euro..

Real estate stocks were cut from overweight to underweight, with strategists suggesting the sector is “unlikely to benefit from a turn in bond yields and PMI, while its valuations are not particularly attractive.”

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