European stock markets have lagged US equities since the beginning of last year, but that could be all about to change according to one analyst.
Mislav Matejka, head of global and European equity strategy at J.P. Morgan, says that US stock prices are now looking expensive after 2 years of sustained share price gains. Going forward, the real value is in undervalued European stocks. As MarketWatch’s Europe editor Steve Goldstien notes, the price-to-earnings ratio for Euro Stoxx 600 companies is 15.2 according to J.P. Morgan, compared to 18.5 for S&P 500 stocks.
But before investors fill their boots in European stock markets, is there really enough evidence to suggest that conditions are right for a share price rally?
Why European stocks are set to rebound
On the charts, the Euro Stoxx 600 is only nominally up since the start of January 2018. At the same time, the S&P 500 has gained over 11% as part of the longest bull market in its history.
S&P 500's gain since the start of January 2018
However, the macroeconomic issues that have hurt Europe's markets in this time look to be easing. The US and China are due to sit down to hammer out a way out of the ongoing trade war. A resolution here would help Europe's export-dependant countries, including the powerhouse German economy.
Brexit is also entering its end game. Once the UK does leave the EU, some sense of clarity and confidence in European stock markets should return. This coupled with monetary stimulus from the European Central Bank should help Europe's weak PMI to pick up.
“Fundamentally, we believe the long downtrend in Eurozone PMIs should be coming to an end. The only time when Eurozone new orders were meaningfully weaker than current was during the great financial crisis crash, when credit markets stopped working and banks balance sheets were under pressure,” said Mislav Matejka in his analysis on MarketWatch.
“Fundamentally, we believe the long downtrend in Eurozone PMIs should be coming to an end” - Mislav Matejka on MarketWatch
Against this background, now could be the time to pick up undervalued European stocks ahead of any rebound.
3 European stocks to watch
Anheuser-Busch InBev SA/NV
One of the world's biggest drinks companies, Belgium-based Anheuser-Busch InBev SA/NV's  share price has staggered since its September IPO and is currently down over 22% this year.
Yet, that weakness could represent a buying opportunity. Consensus among analysts is for AB InBev’s stock to hit €99.2, a 28% jump on the current price.
According to Guggenheim analyst Laurent Grandet AB InBev “has one of the most attractive growth algorithms in the space with continued optionality for M&A given the recently completed IPO in Asia-Pacific.”
Grandet has a €106 price target on the stock, a refreshing 39% upside on the AB InBev’s current share price.
Fly Leasing Limited
It's been up, up and away for Fly Leasing Limited's share price, which has soared 91% in 2019. The Irish company, which purchases and leases commercial aircraft is expecting 100.7% growth in earnings this year, handily beating Zacks Transportation - Equipment and leasing sector's 1.66% projected rally.
Fly Leasing looks to be good value too, carrying a price-to-earnings multiple of 4.37X and a price to book of 0.84. Back in August, Goldman Sach's upgraded its rating on the stock to Buy, and last month JP Morgan also upgraded its rating.
After such a stratospheric rise, is there any more upside in Fly Leasing’s share price? Analysts think so, pinning a $24.5 price target on the stock. Hitting this would represent a 19.6% gain on the current share price.
Unilever's share price is up over 11% this year, trading just below its 50-day moving average. The British-Dutch company is one of the world's biggest manufacturers of consumer products, with 2.25 billion people using its products every day.
While a slowdown in growth in emerging markets like China has dampened revenues, its investment in Asia could make it a long-term play.
Back in September, Goldman Sachs upgraded the stock to Buy with a €57 price target, an 8% upside on the current share price. For income seeking investors, the stock carries a healthy 3.06% forward dividend yield.
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