European stocks have been better than most regions this year, and strategists at Morgan Stanley say the outperformance will continue.
Revisiting their theme about the changing face of European equities, strategists at Morgan Stanley led by Graham Secker point out that the price-to-earnings over the 12 next months — relative to the rest of the world, excluding the U.S. — is at a 10-year high.
The combined weight of old economy stocks in the energy and financials space has fallen to below 20%, from 34% in 2010. Reflecting the shift, the strategists point out that chip equipment maker ASML
is closing in on becoming the largest stock in Europe, overtaking Nestle
ASML is in fact larger in size than the entire automotive sector.
“Logically, Europe’s shift to a superior sector mix should imply a higher valuation in anticipation of stronger, less volatile EPS in the years ahead,” they said. The U.K., by contrast, still has an “unfortunate” sector mix, as commodities and financials account for 40% of MSCI UK versus 25% for MSCI Europe-ex-UK.