We think 2015 could be the first year since 2006 in which European equities outperform global equitymmarkets, as performance is boosted by the followingmdrivers:
* Euro-area economic momentum is likely to rebound on the back of the sharp easing of financial conditions due to the fall in the euro, bond yields and the oil price;
* The ECB’s QE program should boost EPS growth by weakening the currency and lowering European corporates’ interest expenses. Partly as a consequence of these factors, we expect European EPS growth this year to be stronger than that in the US for the first time since 2008;
* There is still a significant risk premium priced into European equities: the price to book relative to global markets remains close to a 20-year low and the equity risk premium relative to that in the US is about 100bps higher than suggested by fundamentals;
* Investors are still bearishly positioned on Europe, but fund flows are starting to improve.
We highlight European companies that our analysts believe offer a strong franchise and attractive valuations relative to global peers. Of these, BMW, IAG, RyanAir, Deutsche Post, Eurotunnel, Publicis, Philips, IHG, AXA, Prudential and UBS are OW-rated by our analysts and are in sectors where we are overweight.