Morgan Stanley says it is “bullish” on European equities, forecasting the MSCI Europe index to grow 11% this year. That rises to 16% when taking into account dividends and share buybacks. 

The MSCI Europe carries 425 of the largest and most exciting publicly listed companies in Europe, including luxury retailer LVMH, obesity pill phenomenon Novo Nordisk, and semiconductor giant ASML.

The reason for the banking giant’s bullishness is all a matter of history, specifically those of uncannily similar economic cycles.

A ’90s ‘cycle playbook’

Working with economists, the bank created a “cycle playbook” to determine which economic period was closest to the current one, landing on the U.S. soft landing of 1995, which also brought a “softish” landing and low growth to Europe.

The bank’s argument about the similarities between the two time periods is compelling.

First, the dominant conversations leading markets were over interest rates and inflation, the positive response to bad economic data that increased the chances of rate cuts, and the “undercurrent of technological innovation” present in both the explosion of the internet in the 1990s and the onslaught of AI today.

The 1990s also brought similar movements from central banks. The Fed began a pivot before delaying rate cuts until later in the year. European central banks were slower to follow the U.S. with rate cuts, as they appear to be now.

Even growing current concerns about the U.S. deficit and debt have parallels with the grungy ’90s. Last week, Black Swan author and financial crisis clairvoyant Nassim Taleb said the U.S. was in a “death spiral” over government debt.

“Notably, Europe’s low valuation starting point and re-rating path so far is exactly in line with the 1995 Fed pivot playbook,” said Marina Zavolock, Morgan Stanley’s chief European equity strategist, on the bank’s Thoughts on the Market podcast on Jan. 26.

“Bringing everything together, our cycle, factor, and thematic analysis, we arrive at 16% total return upside to European equities this year and overweights on European software, aerospace and defense, diversified financials, pharmaceuticals, and telecoms, among other sectors,” said Zavolock.

European equities give hope amid a struggling economy

Morgan Stanley’s optimistic view of European equities comes despite fairly grim economic data from the region’s biggest hitters as they struggle to insulate themselves from multiple crises.

Europe has stuttered since the disappearance of cheap Russian oil and gas in the wake of sanctions that followed the country’s invasion of Ukraine. Meanwhile, growing tensions in the Middle East raise fresh concerns about crucial supply chains.

The German economy, the continent’s biggest, shrank by 0.3% last year and hasn’t registered a positive quarter of economic growth since mid-2022. 

The MSCI Europe index, however, registered growth of 20.7% in 2023, helping more than offset a gruesome 14.5% contraction the year before. The regional index, however, has lagged global benchmarks for several years.

But there is hope in Morgan Stanley’s forecast and the equities that occupy the index.

Companies like LVMH and Novo Nordisk have registered impressive growth in the past year and represent the more dynamic elements of a European market that has become accustomed to the presence of less innovative energy and manufacturing stocks.