Citi Says Europe Too Bullish on Equities

By Geoffrey Smith 

Investing.com -- European analysts are too bullish on their local stocks, despite a drop of around 20% so far this year in benchmark indices, according to Citigroup analysts.

Citi's team of European equity strategists said in a note to clients on Thursday that, while their own current advice is to buy the dips in European equities, they're concerned by the fact that sell-side analysts are almost unanimously bullish.

"This measure of consensus buys against sells is up near peak bullishness," the note said. "It has been a contrarian sell signal in the past, with extreme bullishness preceding significant market falls."

Citi notes that it takes an awfully long time - six months - for European analysts to translate downward revisions to their earnings forecasts into recommendation downgrades. While they have begun to downgrade their forecasts, the recommendations are still largely bullish, except in transportation.

Citi believes that their rivals in Europe have been lulled into a false sense of optimism by the decline in valuations this year, not taking into account the earnings downgrades that seem likely to follow the sharp deterioration in the economic outlook for Europe due to Russia's invasion of Ukraine. That's particularly true for the semiconductor sector, where the likes of Infineon (OTC:IFNNY) and BE Semiconductor  (OTC:BESIY) have fallen over 40% this year, while STMicroelectronics (NYSE:STM) has fallen over 30%.

Energy and retail are two other sectors where sell-side bullishness is most pronounced - the latter standing out particularly given the poor outlook for household finances with energy bills set to go through the roof in the second half of the year.

Among the individual stocks that Citi's team see most at risk from being caught out by downward earnings revisions are U.K.-based betting company Entain (OTC:GMVHY), homebuilder Persimmon (LON:PSN) and German fashion and athletic apparel group Puma (ETR:PUMG). French grocer Carrefour (OTC:CRRFY) and German-based meal delivery group HelloFresh (OTC:HLFFF) are also on the list of 'buys at risk'.