Outlook 2010] JPM targets 20% gain for Euro equities

Posted by Neil Hume on Dec 07 10:29.

Markets may have rebounded by 60 per cent since March, forecasts might look punchy, the consumer backdrop challenging and there’s the possibility of a dramatic bond market sell off and policy normalisation ahead. But in spite of all that, JP Morgan remains bullish on European equities.
The bank looking for further gains in 2010 and has set a year end target for the MSCI Europe index of 1,300. (Current level is 1085).
And here’s why.
JPM thinks Euro equities will enjoy a re-rating if the positive growth–inflation trade-off prevails. In other words, the bank expects real GDP to grow above trend but inflation to stay low, allowing the world’s big central banks to remain accommodative for longer.
A sort of not too hot, not too cold scenario.
We find investors to be skeptical regarding the durability of the unfolding economic recovery, but our view is that it will have legs, with an improvement in labour markets confirming its sustainability. In addition, the stabilization in the credit markets, signs of house prices troughing, steep yield curve and the rebound in corporate profitability are the positives.
The consensus European EPS growth expectations for the next two years call for 40- 50% cumulative growth, which we think is achievable looking at the patterns of past rebounds and the relatively high profit margins at the trough. Equity valuations have recovered back to long-term averages, but we think there is a potential for further multiple expansion if the positive growth–inflation tradeoff prevails, where developed world central banks remain accommodative for longer, and inflation remains subdued. In terms of trajectory, we think the 1st half of the year offers the better risk-reward, while the interest rate uncertainty might start hurting equity performance in the 2nd half.
At the sector level, the bank expects cyclicals to outperform again, although high yielding stocks might do well.
We continue to expect the outperformance of Cyclicals in 2010, but to a much lower extent than over the past few quarters. We believe relative earnings momentum will again become an important driver of performance, as well as the outlook on pricing margins, spreads between output prices and input costs. In addition, we think the yield compression theme will favour selected high yielding parts of the market. We prefer continental to UK stocks.
Based on this growth-inflation scenario here’s what to own…The ones to buy: Alcatel Lucent, AB InBev, Arcelor Mittal, ASML, BBVA, Big Yellow, British American Tobacco, Carrefour, Daimler, Danone, Deutsche Post, Fortis, HSBC, Iberdrola Renovables, Ipsen, JC Decaux, KPN, LVMH, Roche, SFK, St Gobain, Soc Gen, Swiss Re, Syngenta, Unicredit, Unilever and Wood Group.
And what not to own:The ones to avoid: Acergy, Acerinox, AstraZeneca, Barry Callebaut, Clariant, Diageo, Drax, Ericsson, Fiat, Hermes, Husqvarna, Italcementi, IVG, Lagardere, Nordea, Oriflame, Panalpina, RBS, Sanisbury, STM, Swedish Match, Telecom Italia and Unipol.

Article Series - Outlook 2010
The deluge begins
Deutsche Bank ponders all things sovereign
Goldman sees 2010 as 'exciting, with risks!'
Goldman Sachs up 12-mth gold forecast to $1350/toz
JPM targets 20% gain for Euro equities