Analysts at investment bank Morgan Stanley said Monday that they are Overweight on global equities and prefer two regions in particular.
As an earnings recovery takes hold, Morgan Stanley said attractive valuations and resilient earnings revisions support their relative preference for Japanese and European equities.
Meanwhile, in the US, robust EPS growth alongside modest multiple compression is forecasted, which is typical of a mid-to-late-cycle environment.
Morgan Stanley remains selective in emerging markets, with India, Semiconductors, and Technology Hardware in Korea and Taiwan standing out.
"In Japan, we expect a strong earnings and ROE backdrop to support performance – we see 17% potential upside," wrote the bank. "In Europe, we see 18% potential upside, driven by a combination of multiple expansion and an earnings recovery; we prefer bond yield-sensitive stocks and quality growth sectors."
Morgan Stanley raised its base case price target for MSCI Europe to 2,500 from 2,230, while for the Tokyo Price Index, known as TOPIX, its new price target is 3,200, up from 2,800. For the MSCI Emerging Markets, the new target is 1,090, up from 1,000.
The S&P 500 12-month price target was raised to 5,400. Morgan Stanley explained: "Our bull versus bear case skew, although balanced, is wider than normal, which reflects a greater range of potential outcomes over the next 12 months. We prefer large caps over small caps and a barbell of quality growth and quality cyclicals."
Even so, the firm believes valuations are more compelling outside the US.
"The MSCI All Country World ex US Index trades at a ~7 turn discount to the S&P 500 – close to the widest gap we've seen since 2010," they add. "We think that relatively attractive valuations in Japan and Europe coupled with strong earnings growth and revisions breadth support our relative preference for these areas of the world from an equity allocation standpoint."