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(Bloomberg) — European stock markets could rise another 5% by the end of the year, driven by “an explosion of earnings,” said Beata Manthey, head of European equity strategy at Citigroup Global Markets Ltd.
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“If you look at what is happening on the earnings front and the parts of the market that are actually driving the index level, they are doing pretty well,” Manthey said in an interview with Bloomberg Television. “We’ve been seeing an explosion of earnings in the last reporting season, so from that perspective I don’t see risks.”
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Stocks can move higher even in the face of increased bond yields, she said, as long as the pace of inflation doesn’t pick and economic growth, as measured by purchasing manager indexes, remains solid.
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“If PMIs start rolling over that could trigger, or historically have triggered, a selloff in equity markets,” she said.
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Europe faces greater impact from higher oil prices than other regions, and Citigroup last month shifted its view to favor stocks in the US versus the rest of the world.
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“There are no miracles,” she said. “Economies and parts of equity markets exposed to higher energy prices will see downgrades, and we are already starting to see them.”
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Yet Citi hasn’t changed its target for European stocks nor its earnings growth forecast, because an “explosion of earnings in energy” is offsetting downgrades elsewhere, she said. The market rally has occurred “in this very narrow fashion,” Manthey said.
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Still, Manthey warned of increasing frothiness around artificial intelligence.
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A Middle East ceasefire would trigger a squeeze in European equities as underweight investors rush in, though a Ukraine resolution “will potentially be even bigger than the Middle East,” she said. Citigroup recommends technology, materials and financials via banks, while maintaining caution on sectors exposed to higher inflation.
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This story was produced with the assistance of Bloomberg Automation.
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