Investing.com -- Investors should “fade any rebound in the euro” or European equities relative to their US counterparts, BCA Research said in a Monday note.
The investment research firm identifies several persistent headwinds for European markets. Chief among them are weak Chinese economic growth, heightened trade uncertainty, and tightening global financial conditions.
According to BCA, these forces will likely depress global and European growth, directly impacting the euro and the bloc's equity performance relative to US markets.
While technical indicators suggest that the euro and European equities are oversold, pointing to a potential short-lived rebound, BCA maintains a cautious stance.
“The euro is becoming oversold on a tactical basis and looks set to rebound. However, we doubt that this rebound will be long-lasting,” BCA’s report states. Similarly, any rebound in European equities relative to US stocks is expected to be a countertrend move rather than the start of a recovery.
BCA also underscores the outsized influence of China on European markets. Weak Chinese demand and insufficient stimulus measures are seen as limiting European export growth, while declining Chinese yields continue to signal deflationary risks.
“BCA expects Chinese imports to remain soft, which is consistent with an additional underperformance of European shares,” the firm said.
Adding to the challenges is the prospect of US-Europe trade tensions. The potential for new tariffs and related uncertainty could act as a drag on global trade and investments, further amplifying Europe’s vulnerabilities.
Citing research by the Banque de France, BCA says this uncertainty “can shave 1.5 percentage points from global growth,” disproportionately impacting Europe, given its export-dependent economy.
In terms of investment recommendations, the firm advises a defensive approach within European portfolios, favoring defensive sectors over cyclical ones. It also signals a longer-term buying opportunity in the euro and European equities, contingent on a resolution to trade uncertainties and a recovery in global growth.
“A multi-year opportunity to buy European assets and the euro will eventually emerge when trade negotiations between Europe and the US proceed,” the report says.
For now, however, the recommendation is to avoid betting on sustained rebounds in European assets. Investors should wait for more favorable conditions, as the “next quarters will remain challenging for Europe.”