Credit Suisse downgrades European equities on Italian risk and valuations

The German share price index, DAX board, is seen at the stock exchange in Frankfurt, Germany, March 21, 2018. REUTERS/Tilman Blasshofer

LONDON (Reuters) - Credit Suisse global equity strategists downgraded continental European equities to underweight on Wednesday, saying valuations in Europe were not cheap and Italian political risk was unlikely to dissipate.

European equities are trading on the same sector-adjusted price-to-earnings as U.S. equities, not adequately pricing in the risks from a weak Italian economy and friction between its new government and Europe, Credit Suisse said.

“Continental European equities are pricing in just a 15 percent probability of a eurozone crisis, compared with the 32 percent probability being priced in by the BTP/Bund spread,” the strategists wrote in a note.

They calculated this probability by comparing both the current spread and the high reached during the Greek crisis to the post-crisis low. The ratio, assuming the Greek crisis high as 100 percent probability, gives the 32 percent figure.

And if Italy’s political situation does improve, the euro should be the first to gain, rather than equities. “The euro is in effect cheaper than euro area equities,” the strategists said.

They remained underweight on Italian equities, but also stayed “overweight” on European banks, which have been the worst-performing sector this year.

Credit Suisse’s global equity strategy team also upgraded Japanese equities, saying the market had reached near record low valuations.

Reporting by Helen Reid, Editing by Danilo Masoni