Global Markets Update: Further Upside For Eurozone Stocks
Despite our upbeat view on US economic growth and stocks, we think that eurozone equities are a good medium-term risk-reward play, and we maintain our MSCI EMU over MSCI US equities asset class strategy view.
From 17.3 at initiation, we continue to target a ratio of 14.0, implying 18% relative upside for eurozone stocks from current levels. The decline in periphery eurozone bond spreads augurs well for continued eurozone equity improvement. The US price-to-book ratio relative to the eurozone's hit a 12-year high in mid-2012, as periphery eurozone spreads were peaking.
Although we are mindful that periphery spreads are arguably being held down artificially by the European Central Bank's Outright Monetary Transactions (OMT) programme, the correlation of Spanish spreads to the price-to-book ratio premium suggests that valuations can head another 10% in the eurozone's favour.
With major structural issues still yet to be resolved in the eurozone (as we discuss in our new special report, A New Roadmap For The Eurozone, 2014-2018), it is difficult at this stage to see multi-year eurozone outperformance over the US, which is partly why we are waiting to see how the fundamentals look, once the ratio reaches 14.0, and then reassess our view. But even so, we believe that the potential rewards outweigh the risks in this relative value play.
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This Week's Trivia Question
Last week's question was inspired by news that New Jersey governor Chris Christie had fired an aide who allegedly orchestrated traffic jams to settle political scores with a Democratic mayor who did not endorse his re-election. Our trivia question was, which former president (in the world, not US president), who left office in 2013, held a PhD in traffic management? (Hint: his country has been at odds with the US for almost exactly 35 years.) The answer is former Iranian president Mahmoud Ahmadinejad.
This week's question is as follows: what London landmark celebrated its 255th anniversary this week? And what is its nominal past connection with a nearby building now occupied by the Nationwide Building Society?