According to major Wall Street firms, compared to U.S. stocks, European stocks are at their cheapest ever, and among the major European markets, the UK stock market might be the most inexpensive.
In a report released on Monday, Citigroup's strategist team, led by Beata Manthey, upgraded the rating of European stocks to buy while downgrading U.S. stocks to neutral.
According to Manthey's team, influenced by factors like the weakening U.S. dollar, European stocks are "trading at a record discount once again." Based on 12-month forward price-to-earnings ratios, the Stoxx Europe 600 index's trading price is 36% lower than the S&P 500 index. The two major indices' growth rates so far this year are 4.62% and 15.03% respectively, with the latter mainly driven by the AI investment wave, causing a significant surge in tech giants like Apple, Microsoft, and Nvidia.
Earlier this year, Manthey had accurately predicted the superior performance of European stocks over U.S. stocks. However, she became pessimistic in March, and she and her team downgraded the global information technology stocks rating. They anticipated a pullback in large growth stocks but indicated a plan to buy on dips.
Regarding company profit outlooks, Citigroup forecasts earnings per share will decelerate modestly, not drastically decline. The economic outlook faces more balanced risks. A "soft landing" scenario seems plausible, but tightening credit conditions remain a significant obstacle.
As Citigroup is concerned, soaring inflation could cause the European Central Bank to maintain its hawkish stance. In June, the European Central Bank raised interest rates by 25 basis points and left room for further increases. ECB President Christine Lagarde later suggested a hawkish stance, declaring the need for sustained action and a likely interest rate hike in July, without considering rate cuts currently.
In addition, Citigroup downgraded the rating of UK stocks to "neutral," likely due to the lack of investment in growth stocks in the UK market and the strengthening pound, which could continue to be a drag.
However, Morgan Stanley views the UK stock market as the cheapest globally.
In the latest report, Morgan Stanley's strategist team led by Graham Secker stated, "Investor sentiment towards the UK is currently quite pessimistic; however, if inflation begins to recede, market sentiment may change."
Morgan Stanley noted that while UK assets have offered relatively attractive valuations for some time, against a backdrop of the last 20 years, UK stocks and corporate debt are the world's cheapest assets.
As high inflation forces the Bank of England to maintain a hawkish stance, exacerbating market concerns about economic recession, the UK stock market has been the worst performer among major developed European markets this year. The UK's FTSE 100 Index has fallen by 3.5% year-to-date.
Morgan Stanley anticipates that the performance of UK large-cap stocks will not outperform their global peers in the coming months due to softening corporate earnings and the outperformance of growth stocks. However, the bank stated that UK mid-cap and small-cap stocks look inexpensive, and they could become attractive if inflation starts to decline and boosts economic confidence.
Although the market expects the Bank of England to further tighten monetary policy, with interest rates peaking or rising above 5.5%, Morgan Stanley's strategists currently do not foresee an economic recession in the UK.
