Pease says that although the US has been highlighted as the first in and first out of recession scenario, historical market troughs actually show that the pair move similarly in terms of a response.
Pease says the European market actually peaked before the US, with the MSCI Europe index turning downwards in July 2007. He also believes there are several factors that indicate strength in the next 12 months, such as government’s being in a stronger position than it’s US or UK counterparts.
He also believes that the European Central Bank has more ammunition to stimulate the economy after making the decision to cut rates later than others.
Pease says the strong Euro also acted as a brake on earnings in 2008.
He says: “As the ECB cuts interest rates, the relative yield attraction with other currencies will diminish. A weaker euro would improve the profitability of those companies with overseas earnings and further support valuations.
“For a sustainable rally to be achieved, however, the US housing market needs to find a floor and credit markets must reopen. It would be a brave investor, therefore, who bets against US hegemony in equity market direction. Nevertheless, the past 18 months has seen the fall of many long-held stock market tenets, so maybe a European-led recovery should not be entirely dismissed.”
Pease says investors should not hide in traditionally defensive stocks, stating that some areas are overlooked because of cyclical sector classifications.
He says: “The trick is to identify companies that are likely to have good managements and sensible enough business models to get through the current malaise and be in a position to take advantage of the recovery when it arrives.”