European stocks are are having a good year so far. The benchmark Stoxx 600 is up around 7% since the beginning of 2023 — its strongest start in over 26 years, according to Bernstein’s analysis. That’s better than the S & P 500 , which returned 5.8% in the same period. While the underperformance has been marginal, the outlook for U.S. stocks is decidedly more muted — Wall Street is still wary of a recession. European stocks are therefore worth a look in the near term, according to Bernstein, which expects more upside for them. “We think there is still moderate upside. The region is still trading at a discount to its average historical multiple, both in absolute and relative terms. It is still cheaper than usual vs. the U.S,” Bernstein’s analysts, led by Sarah McCarthy, wrote in a note on Jan. 24. The bank added that there’s more room for “positive earnings surprises” in Europe than in the United States, given lower earnings expectations for the former. On top of that, share buyback yield is higher in Europe than the U.S. for the first time ever, according to Bernstein. Stock picks One of Bernstein’s top plays is low leverage stocks, which the bank defines as stocks with a low net debt to equity ratio. “Our macro analysis shows that European low leverage can outperform when leading indicators are predicting recessions and also when interest rates are rising, as is the case presently,” Bernstein strategist Mark Diver wrote on Jan. 19, adding that low leverage stocks have returned an annualized average 8.7% in past European recessions, he added. The bank’s top overweight-rated picks in this area are Publicis Group , LVMH Moet Hennessy , L’Oréal , Equinor and Airbus . Barclays is also “tactically overweight” on Europe compared with the U.S. because it views the region’s stocks as under-owned and cheap. It named seven “conviction stock ideas with catalysts” in the coming quarters, which it said has average potential upside of 25%. Finnish oil refiner Neste makes the bank’s list, given the bank’s view of a global shortage of renewable diesel to support product prices until at least 2024. Barclays also likes German energy firm RWE for its “undervalued” renewables growth pipeline. “We believe investors are overlooking RWE’s transformation into Europe’s third-largest renewables player, particularly related to its renewables growth pipeline,” Barclays’ analyst Rob Bate wrote on Jan. 20. Also making Barclays’ list is Telefonica Deutschland . The bank said it believes the company can deliver low-to-mid single digit revenue growth that will translate into rising free cashflow, which will in turn support the company’s dividend payouts. Morgan Stanley named several stocks to buy ahead of a hotly anticipated earnings season in Europe. They include Universal Music Group , whose share price the bank expects to rally into earnings season, as well as French hospitality group Accor , which Morgan Stanley expects to deliver a strong fourth quarter and beat consensus estimates. Other picks include SAP, Teleperformance and Elis. Bank of America has a number of European picks with exposure to higher Chinese consumer spending and improving overall demand in light of China’s reopening. Dutch tech investment group Prosus NV derives 80% of its revenue from China, giving it the highest sales exposure by a long mile, according to Bank of America. Other stocks with more than 30% revenue exposure to China include BMW , Standard Chartered , HSBC , Infineon Technologies , Porsche and Swatch . — CNBC’s Michael Bloom contributed to reporting
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