Strategists Unfazed by War Expect European Stocks to Bounce

Market strategists are sanguine about mounting inflation fears caused by the Iran war and expect European stocks to return to record highs, according to a Bloomberg survey.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — Market strategists are sanguine about mounting inflation fears caused by the Iran war and expect European stocks to return to record highs, according to a Bloomberg survey.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.The Stoxx Europe 600 Index will finish the year about 11% above Friday’s close, at 635 points, according to the median of 16 forecasts. For now, strategists view the conflict and the spike in oil prices as temporary factors that won’t derail an acceleration in European economic growth. None of those surveyed cut their targets for the European benchmark index this month, while Unicredit SA and Deka Bank even slightly raised their view. The latter joined HSBC Holdings Plc as the biggest bulls, with a 670 points target that implies a rally of 17%. The two most bearish strategists see the threat of a drop of about 2%: TFS Derivatives and Bank of America Corp.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.The strategists were polled before US President Donald Trump gave his ultimatum that Iran fully reopen the Strait of Hormuz within 48 hours. And the mood in equity markets is certainly not optimistic as the week begins, with the Stoxx 600 index falling 1.6% and set to enter a technical correction.

The Middle East conflict has disrupted global energy markets, triggering worries that central banks will need to raise interest rates in response to surging price pressures, just as economies falter. But the most optimistic of the strategists are looking through those risks, pinning their expectations on a speedy end to the war that will restore the positive set up for growth and earnings seen at the start of the year. “The dramatic Middle East events will naturally lead to risk-off behavior in the markets in the short term, but if one is to have a time horizon longer than the next days/weeks, on a 3/6/12 month time frame, one should be using the weakness to add into, in our view,” said a JPMorgan Chase & Co. team led by Mislav Matejka. “Military conflicts are of course unpredictable, but we suspect the escalation is unlikely to stick for long given political calendars, and we find the fundamental backdrop as constructive.”The level of bullishness on European equities is “diminished but not derailed,” according to the latest Bank of America fund manager survey published last week. That said, concerns about reducing equity exposure by too much have been overtaken by worries around cutting stock holdings by too little. The percentage of respondents in BofA’s survey who see upside for the market over the coming months plunged to a net 36%, from 67% a month earlier. The proportion that still expect gains over the next year dropped to a net 71%, from 89%.Beneath the headline forecasts, there has been a major shift in sentiment, at least in the near term. Worries about inflation and economic risks are tempering enthusiasm among investors about Europe’s fiscal stimulus and expectations of strong earnings growth. Brent crude prices are up more than 50% since the war began and natural gas futures have nearly doubled. The Stoxx 600 is set for its worst month in six years, having dropped 11% so far in March. After starting the year expecting rate cuts, traders are now fully pricing three interest-rate hikes from the European Central Bank in 2026.What Bloomberg Intelligence strategists say:“The Iran conflict reopens a key threshold for European stocks: during past oil spikes, most sectors posted positive median returns until Brent topped $100, but beyond that level leadership narrows and economic risks rise. The DAX is most exposed on negative oil beta and energy-intensive tilt, while the FTSE 100 and CAC benefit from heavier energy weights.”— Laurent Douillet, senior equity strategist. Click here for full reportWhile investors have been reluctant to sell stocks aggressively during the conflict, they have have started to rotate exposure to more defensive sectors such as telecoms and utilities. They have locked in gains on the biggest winners of the recent period, as well as shares sensitive to the economic cycle, such as banks, miners, autos and construction materials. The rally in oil prices has boosted energy stocks, while airlines have been hit hard. “We downgraded continental Europe from overweight to neutral in January due to rising geopolitical risks and mounting headwinds for exporters,” said Beata Manthey, head of global and European equity strategy at Citigroup Inc. She has retained her 640 point target for the Stoxx 600. “Persistently higher energy prices are likely to weigh on energy‑intensive European manufacturing sectors, even though sensitivities are lower than in 2022. On a more constructive note, the earlier bullish investor positioning has now fully unwound, both at the broader index level and within European banks.”The Citi strategists are overweight the UK, which historically serves as one of the most effective geopolitical hedges. Since the start of the war in Iran, the FTSE 100 has fallen 8%, while the euro-area benchmark is down 10% in dollar terms. Meanwhile, European stock prices don’t look quite as enticing as they have done, even after the recent drop. They trade near 15 times forward earnings, compared with a 13.3 average over the past 20 years.“Europe remains attractively valued relative to the US, but it is no longer cheap, offering a smaller valuation buffer should geopolitical risks persist or intensify,” wrote strategists at Goldman Sachs Group Inc. led by Sharon Bell. “We continue to forecast 5% and 7% EPS growth for 2026 and 2027, well below bottom‑up consensus — 11%/12% —, but still positive under our assumptions.”—With assistance from Leslie Nutakor.Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.