The summary of the report follows, but big picture: moderate earnings growth and European equity performance expected in 2015 (+7-8%)… For once, consensus is no longer in a double-digit mood as was late 2013…
« 10 summary points….
1) The Euro area is set for further relative stagnation; our economists expect a modest pick-up in 2015 to 0.9% GDP growth but with risks skewed to the downside.
2) This range of outcomes makes the equity prospects quite binary. Stagnation is relatively benign, given current high risk premia, while deflation would be very negative. We think the market is oscillating between pricing secular stagnation and deflation.
3) Profits are likely to grow, but at a slow pace; we expect 6% for SXXP in 2015 vs. consensus at around 12%. FX moves and financials earnings are the key drivers.
4) High margins and low economic growth mean that we expect the earnings rebound will be modest by standards of historical recoveries, with the 2007 EPS peak hit only by 2018.
5) We expect the Stoxx 600 to rise to 365 by end 2015; a real total return of 11% (including dividends) in local currency, but only 2% in $ terms. While low, the total real return is in the 47th percentile of historical distribution and 64th percentile relative to bonds.
6) Our economists put a 1 in 3 chance on a more negative scenario which triggers aggressive QE. Such a move would likely fuel a sharp equity rebound from a lower level, as the required ERP compresses. Under this scenario, we would expect moves of around -10% from current levels, followed by a 25% rise.
7) Income remains a focus: we prefer companies that offer dividend growth together with a decent yield.
8) Selective on growth: companies with cyclical growth offer value but many are facing secular headwinds (commodity and industrial areas, in particular). In our sector portfolio, we focus on financials, services and consumer exposure.
9) We favour EM consumer exposure vs. industrial. Given growth divergence and further euro weakness, we recommend international exposure.
10) Our 2017 SXXP target is 440, only 10% above the level reached in 2007 and 2000. We like Euro STOXX 50 2016/17 dividend swaps as well as long-dated calls. »
Here are some Sector and themes recos: