Morgan Stanley posits Eurozone peripheral outperformance as surprise tip for 2013

Morgan Stanley expects the European Central Bank’s unlimited bond purchase program to be activated next quarter, most probably for Spain, but this localised grief has not prevented European equity analysts at the bank listing ‘peripheral Europe outperformance’ as a surprise prediction for 2013.

Morgan Stanley’s European equities analysts are not alone in suggesting Spain will be the next Eurozone nation to request central support by March, and for ECB president Mario Draghi then to honour his promise to buy its debt in potentially unlimited volumes.

But the bank’s European equity analysts are arguably outside consensus in suggesting peripheral Europe’s shares could outperform its core next year.

Analyst Graham Secker adds ECB support, to keep bond markets open to Madrid, may not come amid the kind of ‘crisis climate’ some of his peers expect.

The ECB could step in early in order to retain stability in Spanish debt markets, once Madrid has requested central financial support, rather than only stepping in once Spanish bond yields threaten to lock Madrid out of markets, he says.

Despite the poor outlook for Spain’s public financing, its shares have qualified in fourth place, for the first time in months, among a list of Europe’s most attractive 16 equity markets, ranked by Morgan Stanley’s inhouse country system.

Fellow equities analyst Ronan Carr says: “If we see a further narrowing of growth rates (between core and periphery) and further narrowing of spreads, we could see other peripheral countires move up the rankings, too.”

He highlighted here the “particularly supportive” and above-average sales exposure Spanish companies have to EMs, including deriving 40% of sales in Latin America, versus 31% for European companies to all EMs, and the likely triggering of Draghi’s unlimited bond buying next quarter “which in turn would trigger further spread narrowing, which would have a positive effect for equities in peripheral countries”.



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