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HSBC upgrades Germany to "overweight", citing the country's exposure to a pick-up in global growth and industrial activity, while also retaining its positive stance on Spain and Switzerland.
"Germany should benefit from the upturn in global PMIs and from a rebound in Chinese growth; it also has relatively strong earnings momentum," Garry Evans, global head of equity strategy at HSBC, says in a note, adding that improvement in Purchasing Managers' Index (PMI) surveys should help German stocks in particular.
Markit's Flash Composite Eurozone PMI, which surveys around 5,000 firms and is seen as a good growth indicator, rose more than forecast in January, to 48.2 from December's 47.2, with German PMI data also beating expectations
HSBC finds that investors in Europe are among the most optimistic in the world, but that bullishness about equities has not yet triggered a contrarian 'sell' signal, even if a short-term consolidation would not be a surprise.
"Few disagree that real GDP growth in the euro zone this year will be poor (around the consensus forecast of -0.2 percent), but most are confident of further rises in European equities," Evans writes in the note, saying that monetary action by the ECB and cheap valuations as supportive to equities.
Threats to the region are seen as unlikely to materialise by HSBC's clients, with Italy's election expected to produce a market-friendly coalition and Cyprus seen as too small to affect markets even as disagreement continues over the Mediterranean state's aid package.
"The current level (of confidence) is above the long-run average, but not yet quite in the territory that would unequivocally indicate it was time to reduce risk," the note says.
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