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European stocks can still rise … but everything will depend on these five factors

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"There is plenty of room for European stocks catch up in the short term. "So believe the experts of Natixis IM, which assure that there are "many arguments" that support the rise in the equities of the Old Continent, although they also warn that it could not find a "strong enough catalyst" to achieve it. Of course, they say that in the medium term Wall street will be the clear winner.

These are some of the conclusions that emerge from the manager's latest analysis of equity markets and their possible behavior now that coronavirus outbreaks are on the rise. On the American stock market he says that "volatility is likely to increase due to tensions between the US and China and also due to the upcoming presidential elections", but in any case don't expect a "long sale". On Europe, Natixis IM is forceful in stating that the rise is possible, although it makes it clear that the pace and scope of it will depend on a number of factors. They are as follows:

1. Depends on the US recovery

Natixis analysts recall that European growth continues to be highly export-oriented and, therefore, will depend on the economic recovery in the US, but also on that of other countries such as China. This, they say, "suggests that there is only limited upward growth if there is not also a strong recovery in the United States", and now it is again in question due to the outbreaks in Europe and the high number of infections in the American country, which has not yet reached the peak. Federal Reserve in its minutes: the pandemic will weigh down the economy "heavily".

2. In the hands of the technology sector

According to the manager, "Any outperformance would have to come from a loss of leadership in the US tech sector", which has experienced a strong rise in recent months and has been the one that has caused Wall Street to mark new highs. In the opinion of Natixis, "it seems unlikely in the medium term" that technology companies will lose steam, which could limit the rise in European stocks. "Income has proven to be more resilient in the United States, in part thanks to a very strong technology sector, which suggests that performance remains strong, "these experts note.

3. Brexit pending

Likewise, Natixis recalls that don't forget about Brexit and the effect it could have on bags if things don't go as planned. At the moment investors do not seem too concerned about it, and that the last meetings between the EU and the United Kingdom have ended without progress, what is more, deep disagreements persist between both parties on how the future relationship should be. "We think some kind of mini-transaction or deal on strategic sectors is likely, but more volatility could occur as we approach the end of the year", say the manager's analysts. The agreement seems distant because, as the EU negotiator, Michel Barnier, has pointed out, everything seems to "go backwards".

4. Strength of the euro

Among the factors underpinning hopes of a rally in European equities, Natixis also mentions the recent euro strength. As you say, interest rate differentials have finally leveled off and supported the common currency, which has advanced positions against the dollar "doing what the assets of the old continent are more attractive to foreign investors"However, the manager warns that this is something that" at some point will begin to weigh on the Old Continent and its exports. "

5. Performance of cyclicals

Finally, these experts point out that " more cyclical sectors should start to perform better, "which would benefit European equities, which are more cyclical / value biased against the US, more growing / defensive." Greater confidence in the recovery and the end of the pandemic would lead to to a better performance of cyclicals. And a broadening of the rally in general would support European assets ", highlights Natixis.

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