Stocks rallied on Monday and Tuesday on hopes that policy makers where about to get their act together and unveil a credible solution to the euro zone debt crisis. On Wednesday the bears were back in charge as stocks and commodities came under renewed pressure amid fears a euro zone resolution was not as close as had been hoped.
Analysts are Credit Suisse have been looking at what it would take to revise their underweight rating on continental European stocks and what to buy if a resolution is found.
“A significant improvement of Europe's bail-out structure would lead us to revise our underweight of Continental Europe,” said Andrew Garthwaite, the global strategist at Credit Suisse in a research note.
“This should involve an increase of the available rescue funds to at least 1-1.5 trillion euros, the involvement of the ECB, a TALF-like facility and bank recapitalizations, a credible timeline for the approval process as well as a plausible funding plan of the increased facility,” he said.
A number of risks remain even if the funds are released, according to Garthwaite who sees significant implementation risk and lackluster growth as fiscal tightening accelerates.
“A weaker euro needs to be part of the solution of the Euro-area problems, we believe. Each 10 percent off the Euro adds 0.7 percent to European GDP growth.”
If things do go well though and the risk on trade comes back into vogue, Garthwaite believes investors should buy the DAX , Enel in Italy, and European insurers like Prudential , L&G, Aviva and Allianz.
The German market could be a major beneficiary of a change in sentiment following heavy losses in the third quarter.
Garthwaite says Adidas , BMW, Siemens and BASF have underperformed global markets overt the past two months and look cheap relative to their peers.
For now Credit Suisse are underweight European stocks. “Relative risk appetite, fund flows and net buy ratings have not yet reached 2010 capitulation levels. Growth fundamentals in Europe remain poor : lead indicators are consistent with a recession , even before further fiscal tightening, peripheral European deflationor the impact of the credit crunch,” said Garthwaite.
Credit Suisse may or may not have investment banking relationships with the stocks mentioned.