Morgan Stanley’s European equity strategists have turned bullish after several months in the bear camp. The team, led by star analyst Teun Draaisma, believes we are in a cyclical bull within a secular bear market . Draaisma and his team are aware of the growing risks in Greece, however, do not expect a double dip in Europe next year:
We recognize there is a risk that the cyclical bull market has ended, if the sovereign crisis leads to a double-dip for European earnings next year. This is not our current view, and our EGLI (earnings growth leading indicator) is predicting 59% earnings growth for the next 12 months, while MSCI Europe now trades on 10x 2011IBES PE.
Draaisma says there are several signs that the current downturn is already over. Among these signs are falling sentiment, signs of capitulation and a strong reaction by authorities:
As the saying goes ‘when authorities start panicking, the market can stop panicking’. Authorities need to get ahead of the curve, in particular with respect to Spain and the banking sector. We will be monitoring the authorities’ actions closely.
They continue to see this is as long-term bear market, however:
Multi-year outlook: secular bear market. We believe the secular bear market is incomplete for a variety of reasons, including that banking crises and bailouts tend to precede widespread government debt crises; that the amount of debt has not been reduced yet (it only changed hands to the government, and now it is moving between governments); that equity valuations never reached end of bear market levels; and our historical analysis that equities tend to struggle for longer in the aftermath of secular bear markets. When the next earnings recession hits, perhaps in 2012, we expect equities to complete the bear market that started in 2000. But timing is everything, and for now we expect positive earnings growth as well as the cyclical bull market to persist.
This all adds up to one thing in the near-term:
Our target of 1280 implies 20% upside and 13x PE, 10% below the long-term average of 14.5x. We view this correction as a buying opportunity.
Source: Morgan Stanley