Strategists at Deutsche Bank stuck to their 'neutral' view for European stocks, despite their being overvalued, arguing that a US-China trade truce and shift towards a Brexit deal would sustain the 'overshoot' in valuations versus their estimate of fair value.
However, having outperformed their US peers by 6% since the low plumbed in December 2018, they also stood by their 'underweight' recommendation relative to US shares.
Like other strategists, they expected to see an improvement in global Purchasing Managers' Indices, but only a modest one, of roughly 0.5 points by the start of the second quarter.
Euro area PMIs were set to improve by about three points and China's by one point, but the US PMI was set for “moderate downside”, they said.
“Even if PMIs continue to improve in line with our projections, our model points to downside for the Stoxx 600 over the coming months. Yet, we remain neutral on the market, as we see the risk that a fade in political risk,” they said.
According to the broker, European shares had moved roughly 8% above the so-called 'fair value' implied by Eurozone PMIs, the euro exchange rate and euro area bond yields), while US stocks were about 5% below fair value.
Hence their prediction that the former were set to underperform by 10% over the next few months.
Their estimate for US stocks fair value was based on the global PMI and the broad US dollar trade weighted index.
“Europe tends to outperform the US only when the global PMI is above 55, while the current level of 52.5 in combination with our expectation of only a mild further rise is consistent with renewed underperformance for European equities.”