Morgan Stanley upbeat on European stocks

Morgan Stanley was upbeat about European stocks after updating its market timing and sentiment indicators, finding they suggested a positive risk-reward profile was now on offer.

The investment firm updated its key indicators ahead of a weekend likely to be dominated by Greek news.

The US bank's market timing indicators for Europe fell over the past week reaching a level of -0.8 standard deviations; equivalent to the troughs seen during the sovereign debt crises of 2011 and 2012.

Despite a subsequent rise in the past two days the firm’s MTI still stood at -0.69SD, with Morgan Stanley explaining that from such a level the market has on average historically recorded a rise of 8.9% over the following six months.

During such phases the historical probability of an up market stands at 82%.

Sectors to benefit from the rebound in the wider market included financials and peripheral stocks.

"Banks tend to perform best from low MTI readings (as we have today). Our preference for Financials to lead any rally in markets also suggests peripheral outperformance."

Morgan Stanley said cyclical stocks have underperformed since April, and warned pharmaceutical stocks in particular appeared "tactically" overbought, after having benefitted as China concerns mounted.

"Furthermore, the recent risk-off trade has been significant and this indicator is down at an extended -3SD – a level that coincided with many of the equity market troughs since 2009 (e.g. May 2010, March 2011, June 2013, Oct 2014)," the bank said in a strategy note e-mailed to clients on Friday afternoon.