European stocks have lagged US ones by 20%. JPMorgan says now is the time to pounce.

european union flag brexitA man carries a EU flag, after Britain voted to leave the European Union, outside Downing Street in London, Britain June 24, 2016.Neil Hall/Reuters

  • JPMorgan in a note said that now is the time to move into European stocks.
  • The bank's equity strategists previously had favored US stocks, but "now believe that that there is a tactical opportunity opening up for eurozone to catch up."
  • This comes despite obvious threats in the European economy, namely Brexit and a slowing German economy that could be headed for recession.
  • The analyst upgraded the euro region to overweight while pushing the US to neutral.
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Equity analysts at JPMorgan are signalling now is the time to move into European stocks over US stocks, saying that "there is a tactical opportunity opening up for eurozone to catch up."

Previously, the bank's equity analysts have favored American stocks, saying European stocks have fallen 20% in dollar terms over the last 18 months.

Mislav Matejka, head of global and European equity strategy, said the bank has switched changed its tune. The bank upgraded European stocks to "overweight" while downgraded American stocks as "neutral."

This moves comes despite obvious threats to Europe in the form of Brexit and a slowing European economy. Just last week confidence in Europe's economy hit a four-year low.

Here's why JPMorgan is bullish on Europe:

1. Europe is "sitting on a significant spell of underperformance, and it is under-owned." The bank pointed to the fact that European stocks in dollar terms lose 20% in relative value and more and more funds are exiting the region - 20% of AUM outflowing since March 2018.

2. The metrics say it's good value. "Eurozone sector neutral P/E relative is close to outright cheap territory," said the bank.

3. Poor economic performance could mean that governments start spending. "Any increase in fiscal stimulus speculations could be a help for the sentiment," said the bank in the note adding that given the trade uncertainty around Brexit, governments might seek to take action. "In 2020, the net fiscal stimulus might increase in a proactive way, rather than just reactive as was the case this year. After all, Eurozone fiscal leverage and primary surplus are far better than in the other main regions."

4. Italy might not be as worrisome as before. "Italian 2020 budget negotiations are ongoing and this could remain a source of volatility. However, Italian spreads have narrowed significantly of late," the bank said, "suggesting Euro assets should benefit."

JPMorgan did outline risks, mainly due to Brexit and whether a deal is formed and, if so, when. But, in a "very bullish" scenario, the bank said that any deal formed before the Halloween deadline of October 31 "would significantly help our eurozone upgrade."

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