Morgan Stanley says it’s time for stock-picking in Europe as earnings season and rate cuts are imminent. The investment bank says stock-level dispersion and equities market breadth should rise from here. Stock-level dispersion refers to the range of returns for stocks, while market breadth tracks the number of stocks going up relative to those declining. Positive market breadth is when more stocks are advancing than declining. “History suggests both dispersion and breadth should rise from here as we head into earning season, pass peak European/UK election uncertainty, cycle through economic growth concerns (reminiscent of a short-lived mid-1990s growth scare, in our view), and approach 2H rate cuts, both in Europe and the US, on the back of softening inflation,” Morgan Stanley analysts wrote in a July 10 note. Against that backdrop, the bank says it’s the “optimal” time for stock-picking. It named its top picks for Europe, which are its analysts’ “highest conviction ideas” within the universe of stocks that they cover. This list of 37 top picks has outperformed the MSCI Europe LC and MSCI Europe EW indexes by 15.1 and 27.5 percentage points, respectively since its inception, according to the bank. These are six stocks from its list. Morgan Stanley called Commerzbank “one of the best yield payers in the sector,” and is strongly profitable. As for Repsol , Morgan Stanley said its shares could get a boost from a near-term “seasonal demand upswing” for oil products, which would lift refining margins over the next couple of months. “Repsol’s financial framework also remains solid, where there is both ability and willingness for high distributions and dividend growth,” Morgan Stanley analysts wrote. The bank sees “room for a valuation re-rating” for Merck . “We believe Merck’s quality is underestimated, and we see an opportunity for a valuation re-rating in the mid term as the market better appreciates the exposure to secular high-growth trends in the Life Science segment … and Electronics,” Morgan Stanley said. — CNBC’s Michael Bloom contributed to this report.
