(2 July 2017)Eurozone stocks ready for lift-off

(2 July 2017)Eurozone stocks ready for lift-off

2 July 2017, 08:18
Jiming Huang

After 15 straight quarters of growth, the Eurozone is currently at mid-cycle, with economic expansion above trend, core inflation low, and there is room for unemployment to fall further, said UBS Chief Investment Office (CIO).

The Eurozone’s economic revival and reduced political uncertainty should enable the European Central Bank (ECB) to start normalizing its monetary policy and this should bode well for the euro. CIO is overweight the euro versus the greenback.

The rise in economic activity should also boost corporate profits. CIO is overweight Eurozone equities relative to UK stocks. CIO said Emmanuel Macron's victory in the recent French elections has reduced political uncertainty in Europe, and this has eased the way for greater collaboration between France and Germany to drive reforms across the entire Eurozone.

Within the Eurozone, CIO is overweight on energy, financials and materials and overweight on Germany.

"After years of stagnation, Eurozone corporate profits should grow at a low double-digit rate this year, excluding strong base-effects from financials and energy," said CIO strategist Bert Jansen.

CIO said year-on-year comparisons will be less favorable for the remaining quarters amid slowing economic growth but nevertheless, a rate of low double-digit EPS growth for this year looks likely, with above-average growth in energy, consumer discretionary and financials.

CIO said cash flows should improve in the energy sector due to ongoing cost cutting measures and higher oil prices down the road. Similarly, financials should do well due to attractive valuations and positive earnings momentum. Materials will also outperform due to a benign economic environment, reflected in solid, synchronized global economic growth, should support the sector.

(By UBS)

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