CIO analyst Thomas Parmentier expects equities in the US to be more resilient than those in the Eurozone. "With corporate earnings growth at
3 percent this year and 7 percent next year, US stocks should be supported. And, despite the slower growth due to fading fiscal stimulus,
a resurgence of the trade war with China and Middle East tensions, the risk of recession in the US remains low."
In this context, US equities are better placed than Eurozone equities. Additionally, the Federal Reserve appears more dovish and could
support the US economy if there were threats to its continued expansion. Parmentier points out that US equity valuations appear fair,
particularly in the current benign growth and low inflation environment.
On the other hand, Eurozone equities are likely to be weighed down as the region still faces several political risks and economic growth
shows no sign of accelerating. "The first quarter reporting season in the Eurozone was mixed and companies experience margin pressure
due to rising wages and commodity prices," explains Parmentier. "Corporate earnings continue to be lowered as economic growth slows
and we are expecting no earnings growth for the MSCI EMU index this year." Eurozone outperformance in the first half of his year was
driven by relatively stable Purchasing Managers' Indexes. However, the escalation of the trade turmoil and slowdown of global growth
are eroding this advantage.
CIO recommends investing in a select group of US stocks and suggests a list of its lowest-conviction Eurozone stocks.
Risks to the CIO view would be a rebound in Eurozone economic data and earnings per share upgrades. Also, signs of an economic slowdown in the US and unexpected inflation could hurt US stocks.
By UBS
