3 Risks European Investors Need To Know About

In a new report, Deutsche Bank analyst Sebastian Raedler discussed the firm’s outlook for European stocks through the end of 2016. Overall, the firm maintains a bullish outlook for the European markets, but Raedler cautioned investors on three potential risks ahead for Europe.

Upside

Deutsche Bank projects 10 percent upside to European equities by the end of 2016. In addition, the firm is calling for 9.0 percent EPS growth in Europe in 2016, “robust” growth momentum and a decline in macro uncertainty.

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Risks

Raedler outlined the following three risks to the firm’s projected European upside:

• 1. Premature Fed Rate Hike

Futures markets are pricing in a 50 percent probability of a Fed rate hike in December, but Deutsche Bank believes that the Fed is “unlikely” to raise rates before the second half of 2016. However, a premature hike could lead to a tightening of global markets.

• 2. U.S. Recession

Deutsche Bank believes that a U.S. recession remains unlikely, but U.S. economic momentum continues to weaken, and corporate balance sheets have begun to look stretched.

• 3. Spike In Eurozone Bond Yields

According to Deutsche Bank, a 0.5 percent rise in real bond yields reduces fair-value P/E ratios by 5.0 percent.

Top Picks

Raedler views each of these risks as unlikely, but believes that any investor playing the European recovery should be aware of their existence.

If the 10 percent upside scenario plays out the way Deutsche Bank projects, the firm predicts that some of the largest returns will come from European bank stocks. U.S. investors can choose U.S.-listed European banks such as Barclays PLC (ADR) BCS, ING Groep NV (ADR) ING, Lloyds Banking Group PLC (ADR) LYG and UBS Group AG (ADR)0 UBS.

Disclosure: The author holds no position in the stocks mentioned.