(Bloomberg) -- The outlook for European equity returns is becoming more challenging as risks of an economic recession loom, according to Morgan Stanley strategists.
“We do not think the market – or any sector in the market – is priced for a recession,” strategists including Ross MacDonald write in a note. “Risks around oil/gas availability mean that we’re assigning a much higher probability of a European recession than usual.”
After rallying over 20% last year, European equities have been under pressure in 2022 as investor concerns about the war in Ukraine, inflation and hawkish monetary policy have curbed appetite for risk. Morgan Stanley strategists pointed to the market’s increasingly cheap valuations compared to global peers, which reflect risks to earnings estimates that are likely to be cut in coming months.
They continue to prefer U.K. stocks, which have outperformed this year, as the narrative for earnings remains healthy and valuations are still not too lofty.
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