(Bloomberg) — European stock investors are in for a bumpy ride next year, according to Morgan Stanley’s Graham Secker.
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While markets should overall trend higher, a double-digit slump in 2022 is “pretty likely,” Morgan Stanley’s chief European equity strategist said in an interview. “Equities have gone up for 18 months in a straight line with no correction of any meaningful magnitude,” Secker said. “I don’t think this will carry on for another 12 months.”
The warning adds to a series of cautious outlooks for 2022, following an unstoppable climb that pushed equity markets in Europe and the U.S. to successive records after the pandemic-induced slump. Strategists from Goldman Sachs Group Inc. to Credit Suisse Group AG expect stocks to continue advancing into next year, albeit at a more muted pace.
“We would be a buyer of the correction, but we also have to recognize that markets have gone up an enormous amount over the last 18 months, so probably the majority of the cycle’s returns from equities has already happened,” Secker said by phone. Decelerating economic growth and the winding down of policy support mean European and global markets will “grind up,” rather than repeat this year’s rally.
“Let’s be clear, the outlook is not as good over the next 12 months as the last 12 months,” Secker said.
Secker sees three main risks for the year ahead in Europe:
Demand surprises to the downside, leading the economy toward a stagflationary environment that will put pressure on corporate margins.
Political risks ranging from the French presidential election to a sharp deterioration in trade relations between the U.K. and the European Union.
Impact from the European Central Bank’s possible tapering on peripheral European debt.
Still, his base case is that none of these risks will materialize, while global headaches, such as supply chain disruptions, will also start to ease. The most probable scenario is a continuation of economic expansion for another 2-3 years “at least,” which will create a benign environment for corporate earnings, he said.
Morgan Stanley’s strategist prefers European and Japanese stocks over the U.S. and emerging markets. European equities trade at a record low valuation versus real bund yields and U.S. stocks, making them an attractive bet, he said.
Among European markets, he singles out opportunities in German stocks, which have been underperforming amid concerns that a slowdown in China will hit the country’s export-oriented economy.
“The valuation of Germany against the rest of the Eurozone is at a 30-year low, the DAX looks quite oversold, and I think part of this reflects market concerns around China,” he said. “In the first quarter of next year, we might get a more positive environment around China, which will also support Germany.”
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