The German stock market could find support after European stocks were supported in recent reports by two investment banks that ignored geopolitics in the region.
Citigroup analysts said they were now “underweight” on US equities due to recession fears but were bullish on European stocks. They cited the excess pessimism and noted that the negative outlook was already priced.
GER30 – Weekly Index
The GER30 rallied hard last week as investors followed this market outlook. There is resistance at the current 14,500 level, with the next target being 16,000.
A Deutsche Bank analyst also feels this will be a better year for European equities.
“Although earnings are likely to fall in 2023, fewer macro risks and lower rate volatility should be supportive for equity markets,” Maximilian Uleer wrote. The market is “overly pessimistic for 2023; we seem to be lonely bulls.”
European stocks have had their worst year since 2018 but still outperform US stocks as cheaper valuations provided support.
Deutsche Bank’s Uleer expects valuations to improve from their 2022 lows but remains below the 10-year average. He forecasts an earnings drop of 10% in 2023. “As the demand side weakens and supply normalises, we expect corporates to no longer be able to sustain their high pricing power and profit margins,” he said.
The significant headwind for European stocks would be an escalation of the conflict between Ukraine and Russia. Stocks have been boosted by talk of a ceasefire; however, Ukraine’s President dismissed it. A 36-hour ceasefire was announced by Vladimir Putin to observe the Orthodox Christmas.
Ukraine’s Zelensky said, “…the war will end either when your soldiers leave or we throw them out.” Another escalation can see a return to higher energy prices and a risk of European nations, such as Poland or Belarus, being dragged into the conflict. Investors should tread carefully on European stock weightings, but the index is tradeable at these levels.
