Morgan Stanley recommends adding exposure to European stocks

The ongoing weakness in emerging markets and China won’t significantly dent the European economy, Morgan Stanley said in its most recent equity strategy note.

The bank said it expects equities to be higher in three months, adding that current volatility in markets is likely to be temporary rather than the start of a long and painful bear market.

“While markets may stay volatile in the short-term, we believe that MSCI Europe will be higher in three months’ time and recommend investors ultimately use this opportunity to add exposure to European equities,” it said.

The bank took the opportunity to highlight 20 names it considers to be the best oversold opportunities in Europe.

These were Akzo Nobel, ARM Holdings, BMW, BNP, Centrica, Credit Suisse, Diageo, Engie , IAG, Intesa Sanpaolo, KPN, LafargeHolcim, LVMH, Norsk Hydro, Philips, Prudential, Publicis, SAP, Telenor and TDC.

On Akzo Nobel, it said free cash flow is recovering, the company has high gearing to a European recovery and the valuation is compelling.

As far is ARM is concerned, it said that while the market is focused on a decline in smartphone unit growth, there are strong pricing tailwinds from the increased royalty rate driven by 64-bit adoption.

Morgan Stanley said BMW has best-in-class returns on capital and cash flow conversion. It added that although China headwinds will continue, these are now being priced in.

For BNP Paribas, it pointed to attractive gearing to the Eurozone recovery and noted that the valuation is at a 20% discount to the European sector.

Morgan Stanley said it expects Centrica to deleverage while growing the dividend and increasing profits.

In terms of Credit Suisse, MS said tighter allocation, particularly in the investment bank, crisper cost management and reinvestment can drive an increase of 1 to 2% in return on tangible equity.

The bank said recent weakness in Diageo shares represent a buying opportunity, given improving momentum, particularly in the US and India.

It said Prudential remains one of its top picks within the European universe. “We believe the group has positioned well to withstand the recent Asian turmoil and the growth story is still intact,” it said.