European stocks face tough environment for long-term investors, says BCA

Investing.com -- European equities are facing a challenging environment this summer, one that BCA Research says is particularly unforgiving for long-term investors.

“Euro Stoxx 50 is boxed in by balanced tailwinds and headwinds; expect choppy moves inside a 4750–5500 range through the summer, a punishing backdrop for buy-and-hold investors,” said Mathieu Savary, chief European strategist at BCA Research.

The investment research firm highlights that while European equities are relatively inexpensive compared to Wall Street, they look expensive versus their own history. The MSCI Euro Area trades near the top of its forward price-to-earnings (P/E) range at 13.6, with little cushion in earnings forecasts.

BCA also warns that forward margins are “near record levels at 8.7%,” with downside risks from rising U.S. tariffs, a strong EUR/CNY, and weakening pricing power.

The broader global rate backdrop is also a headwind. “The Fed is falling behind the growth curve,” Savary says, pointing to the risk of a hard landing in the U.S. and rising global yields that could compress valuations.

European equities, which have a high beta to global markets, are especially vulnerable in a bond-led selloff.

“The pinch is sharpest in the US, however, European stocks sport a high beta that will echo any global equity pullback sparked by a skittish bond market,” Savary said.

With the EURO STOXX 50 trading close to the top of its projected range, the strategist suggests trimming outright exposure and focusing instead on relative value opportunities.

The valuation gap between European value and growth stocks also supports rotation. “European value stocks still sell at an abnormal discount of 50% to growth stocks,” Savary notes, compared to a median discount of 34% since 2003. That, coupled with better performance year-to-date, gives value an edge during bouts of policy-driven volatility.

“European equities will chop sideways until the push and pull between growing earnings risks and the trade war respite resolves,” he continued. “Wait for margins to reset and global yields to settle before adding directional risk.”

Against this current backdrop, the preferred strategies include long positions in core markets versus the periphery, value stocks over growth, and domestically focused names instead of exporters.

Within that framework, the U.K. stands out, with BCA seeing it as “a standout value play.” British stocks offer compelling opportunities thanks to defensive characteristics and a record discount to global peers.