Singing bullishly for European stocks against the trend! Morgan Asset Management refutes the "three major doubts," stating that it's not too late to get on board now

Morgan Asset Management strategists support the European stock market, refuting three major concerns from investors about the outlook for European stocks, insisting that 2025 will be an outstanding year for the European stock market, with the potential to outperform U.S. stocks.

As mentioned in a previous article, major Wall Street firms have been pessimistic about the rise of European stocks recently, with Bank of America downgrading European stocks from "overweight" to "neutral," predicting that the Stoxx 600 still has about a 10% downside, and cyclical stocks may drop another 15%.

On the 29th, Karen Ward, Chief Market Strategist for Europe, the Middle East, and Africa at Morgan Asset Management, pointed out in a column for the Financial Times that Europe is unleashing a strong combination of monetary, fiscal, and regulatory easing. Despite the relatively poor performance of European stocks compared to U.S. stocks over the past decade, historical data shows that European companies experienced strong profit growth from the early 2000s until the financial crisis.

In response to investors' concerns about missing investment opportunities, the strategist stated that it is not too late to enter the market now. The MSCI EMU benchmark index is expected to see an 8% profit growth over the next 12 months, with investors only needing to pay a 14 times price-to-earnings ratio, while the U.S. S&P 500 is expected to see a 12% profit growth but requires a 22 times price-to-earnings ratio.

Analysts believe that the "lost decade" of European stocks continues to affect investors' perceptions of the region, and this significant potential for investor re-evaluation actually strengthens the investment rationale for European stocks to outperform.

Refuting Concern One: European Companies' Profitability is Not Inherently Insufficient

Investors generally question the intrinsic profit growth capability of European companies, often citing structural issues such as fragmented capital markets and a lack of flexibility in the labor market in the region. These views are also reflected in a recent competitiveness report released by former Italian Prime Minister Mario Draghi, which argues that the European economy is structurally impaired and unable to achieve strong profit growth.

However, Ward pointed out that historical data shows that these structural issues have not prevented European companies from generating substantial profits. During the period from the burst of the internet bubble to the financial crisis, profit growth in most sectors of the MSCI EMU benchmark exceeded that of their S&P 500 counterparts. The annualized profit growth rate for MSCI EMU companies during this period reached 29%, while the S&P 500 companies only achieved 13%.

The strategist emphasized that while addressing these structural issues would benefit Europe, historical experience indicates that they do not constitute a fundamental barrier to the profitability of European companies.

Refuting Concern Two: Europe Will Also Benefit from the AI Wave

The second common concern is that the European market lacks the tech giants that are transforming the world with artificial intelligence, suggesting that Europe is lagging behind the U.S. in cutting-edge technological innovation.

But the strategist pointed out that despite Europe's relative lag in technological innovation, European companies will still become key deployers and beneficiaries of these technologies. If European companies do not actively procure these technological products, it would raise questions about the valuation rationality of U.S. tech companies themselves In other words, the widespread application of artificial intelligence technology will bring productivity improvements and profit growth opportunities for European companies, rather than being solely the patent of American tech giants.

Rebuttal to Doubt Three: Euro Appreciation and Stock Market Performance Are Not Negatively Correlated

The third doubt focuses on the possibility that euro appreciation may hinder profit growth for European companies. For European exporters, a stronger euro may indeed drag down profits denominated in euros. Additionally, while the trade agreement between Europe and the U.S. is better than no agreement, it still brings significantly higher trade friction.

The strategist believes that the European economic recovery is likely to be driven by domestic factors, particularly household consumption. As interest rates decline, the still-high savings rate will fall back, driving consumption growth. At the same time, European financial companies will become a key driver of profitability in the region, as banks currently have ample capital to deploy at more normal interest rate levels.

Historical data shows that the view that euro appreciation must drag down the European market is incorrect. In fact, euro appreciation and European stock market outperformance often occur simultaneously. From the early 2000s to just before the financial crisis, MSCI EMU outperformed the S&P 500 by an annualized 5.2 percentage points in local currency terms, while the euro appreciated about 40% against the dollar during the same period. For euro-denominated investors, the annualized outperformance of MSCI EMU reached an astonishing 9.8 percentage points.

Investment Timing: Valuation Discounts Provide Good Entry Opportunities

An increasing number of investors are beginning to agree that the European stock market may be at a turning point, but they are concerned that they may have already missed the investment opportunity. The strategist believes this concern is unnecessary.

From a valuation perspective, the European stock market has not yet fully reflected the sustainable and broad profit growth that should occur in the coming years. Analysts expect MSCI EMU companies to achieve moderate profit growth of 8% in the coming year, with investors only needing to pay a price-to-earnings ratio of 14 times. In contrast, the S&P 500 is expected to see profit growth of 12% over the next 12 months, but investors need to pay a price-to-earnings ratio of 22 times.

More importantly, each sector of MSCI EMU is still trading at a higher-than-average discount relative to its U.S. counterparts. Even after recent gains, Europe's "lost decade" continues to affect investors' perceptions of the region. The strategist believes that this significant potential for investor re-evaluation further strengthens the investment logic for European stock market outperformance