Morgan Stanley names the ‘cheap’ Europe stocks with more upside to come

Published Tue, Sep 14 202111:30 PM EDT

Lucy Handley @in/lucy-handley-b2b0a61a/@lucyhandley

Analysts at Morgan Stanley expect Europe's market rally to continue for the next year, with a "bigger bounceback" in earnings-per-share than the U.S. Here are some of their stock picks. There is "more upside" for the European equity rally, the bank's analysts led by Graham Secker wrote in a note published Sept. 7. The pan-European Stoxx 600 index is currently up over 65% since the start of the pandemic in March 2020. "The macro backdrop for European equities over the next 12m [12 months] is less supportive than that of the last year, however that doesn't preclude further upside. Our new 12m index target for MSCI Europe offers 9% implied upside from here," the analysts stated. "A stronger-than-normal equity rally is arguably justified given that we have also seen a stronger-than-normal rebound in corporate earnings." Stock picks The bank picked a raft of "cheap" European stocks that it rates overweight. The valuations of these stocks are in the bottom half of the bank's 10-year range versus the market and have an estimated 20% upside to its base case 12-month price targets. Banks are its "top overweight" sector. "After modest underperformance over the last couple of months, we expect Banks to lead the European equity market higher from here," the analysts wrote. Financial stocks on its "cheap" list include French firms BNP Paribas and Societe Generale , Spain's Banco Santander , and Dutch company ING . Materials firms with more than 20% upside to the bank's price target include Spanish group Acerinox , Finland's Outokumpu , Nordic company SSAB , Swiss firm Holcim and steel firm ArcelorMittal — all of which are on its "cheap" list. "Building Materials' companies are well positioned to benefit from increased investment in making buildings more energy efficient – the Green Deal calls for a doubling of renovation rates, and our analyst Cedar Ekblom thinks that governments could provide financial support to individuals to speed up renovation," Morgan Stanley's note stated. In energy, it picked Shell and ENI , while in media and entertainment it chose Auto Trader Group and ITV . 'Bigger bounceback' Morgan Stanley said there is the potential for European GDP to rebound, as well as earnings-per-share (EPS), an important measure for investors to gauge the value of a stock. "Europe has the scope to enjoy a bigger bounceback in EPS over the next 12-18 months than many of its peers, especially the US given the potential for a corporate tax hike in 2022," the analysts said. They also said they like the EU's Recovery Fund and expect it to stimulate growth in the region from 2022 onwards.

Dump trucks in the open pit iron ore mine, operated by ArcelorMittal, in Ukraine, on March 6, 2019.

Vincent Mundy | Bloomberg | Getty Images

Analysts at Morgan Stanley expect Europe's market rally to continue for the next year, with a "bigger bounceback" in earnings-per-share than the U.S. Here are some of their stock picks.