Morgan Stanley says with earnings season and interest rate cuts looming, now is the time to pick stocks in Europe. The investment bank said equity-level dispersion and equity market breadth should rise from now on. Stock-level dispersion refers to the range of returns for a stock, while market breadth tracks the number of advancing stocks relative to declining ones. Positive market breadth means more stocks are advancing than declining. “History shows that as we enter earnings season and move past the peak of European/UK election uncertainty, a cycle of economic growth worries that, in our view, is reminiscent of the brief growth panic of the mid-1990s, dispersion and breadth should rise from here, with Europe and the U.S. approaching second-quarter rate cuts on the back of subdued inflation,” Morgan Stanley analysts wrote in a July 10 note. Against this backdrop, the bank said now is the “best” time to pick stocks. It lists Europe’s top picks, which are analysts’ “most convincing ideas” among the stocks it covers. According to the bank, the list of 37 top picks has outperformed the MSCI Europe LC and MSCI Europe EW indices by 15.1 and 27.5 percentage points respectively since its launch. Here are six stocks on its list. Morgan Stanley said Commerzbank has “one of the highest yields in the sector” and strong profitability. As for Repsol, Morgan Stanley said its shares could be boosted by a recent “seasonal rise in demand” for petroleum products, which would boost refining profits in the coming months. “Repsol’s financial framework also remains solid, with the ability and willingness to deliver high distributions and dividend growth,” analysts at Morgan Stanley wrote. The bank believes Merck has “room for revaluation.” Morgan Stanley said: “We believe Merck’s quality is undervalued and see opportunities for a medium-term re-rating as the market better recognizes the long-term high growth trends in the life sciences sector… and the electronics industry.” —CNBC’s Michael Bloom contributed to this report.
