For a Monday morning, Kepler Cheuvreux’s strategist Christopher Potts had a nice wake-up call for investors, recommending them to Underweight Europe and EM and go Overweight US and Japan…
« Our understanding is that we are witnessing the end of the ‘late show’ and the culmination of the upward wave in global equity assets that began early last year »
According to Potts, a number of vulnerabilities have emerged in financial markets, specifically in high yield, EM forex and European equity (contrary to the consensus which states that European equities trade around average valuation multiples with solid underlying earnings growth).
Potts’s call is rather short term oriented since he expects a market correction and there recommends investors to reduce their Europe exposure. « We will doubtless return to Europe’s markets next year, once the surfeit of momentum money is removed. »
Of course it’s a bold move, especially in financial markets where being right too early is synonymous of being wrong.
But why should European equities be out of fashion suddenly? The reason is simple : too much outperformance on the back of a macro environment that is not sustainable.
« The cult of ‘growth without inflation’ this year has given rise to one of the most powerful phases of outperformance of growth-momentum in equity markets on recent record », writes Potts.
« We think we may have about three months to wait before a significant equity market correction unfolds », he adds, underlying the profit-taking move occuring right now in the markets.