JPMorgan strategists Karen Ward and Hugh Gimber are making a bullish call on European equities, citing a significant drop in oil prices as the primary catalyst. Ward projects that Brent crude could fall to $70 per barrel, driven by a US-Iran diplomatic stabilization pact that will unlock frozen assets and increase Iranian crude supply, potentially compounded by weakening OPEC cohesion. This decline in oil prices is expected to act as a "massive rocket" for global equities, particularly benefiting Europe.
Lower oil prices are anticipated to significantly boost European corporate margins and consumer purchasing power. Europe is a net importer of energy, so reduced energy costs directly translate to lower input costs for companies and increased disposable income for consumers. This economic tailwind makes the currently depressed valuations of European stocks, especially in energy-intensive cyclical sectors like Germany's DAX, highly attractive. The strategists suggest a contrarian pivot, shifting from an underweight to an overweight position in European equities.
The oil price slide is also expected to ease inflationary pressures, potentially giving central banks more room to cut interest rates, even after the European Central Bank recently raised rates by 25 basis points. Ward points to Europe as an undervalued market where too much pessimism is still priced in, despite a more pro-growth tone from Brussels. This renewed market breadth and rotation, interrupted by the Iran conflict, is now expected to restart, with capital inflows supporting Eurozone assets and the euro.
The thesis hinges on oil prices remaining at reduced levels for a sustained period, and a sharp rebound in crude prices is identified as a key risk that could derail the strategy. However, the strategists believe that the historic US-Iran accord is likely to hold, with China's economic interests preventing disruptions in the Strait of Hormuz. Overall, the outlook suggests a significant opportunity for investors in European equities.
