We believe earnings momentum is building in the European and Japanese equity markets, and this trend may be the catalyst for higher equity markets, and this trend may be the catalyst for higher equity returns for the remainder of the year. Developed markets should benefit from gradual economic improvements in these regions. Corporate earnings reversions in these markets have turned positive for the first time since 2011. In addition to supporting business and consumer sentiment, another round of quantitative easing (QE) measures launched by the European Central Bank (ECB) and Bank of Japan (BoJ) should provide a nice cushion for equity prices. Equity valuations have increased ahead of improvements in fundamentals and earnings, and stocks are no longer priced as cheaply as they have been in prior years. The MSCI Europe, Australiasia and Far East (EAFE) Index, a primary measure of equity market performance of developed markets outside of the U.S. and Canada, trades at 16.08 times our 2015 estimate. We estimate that price multiples may stay somewhat elevated as investors await the profit cycle to accelerate. 

We are maintaining our overweight to developed market equities. Key risks to this view that bear watching include another rapid slide in the euro against the U.S. dollar, a relapse of economic weakness, particularly in Europe and Japan, and a dip in corporate earnings. Inflated equity market valuations could become a relevant headwind if we do not see earnings growth start to rebound. 

Eoin Treacy's view

Here is a link to the full report.

The drama, or melodrama, of the unfolding situation in Greece has obscured the fact that two of the largest central banks in the world are engaged in outsized quantitative easing programs. As David has said for years “monetary policy trumps just about everything else most of the time” As potential for a deal between Greece and its creditors looks more likely, the attention of investors is returning to the fountain of liquidity coming from the ECB and BoJ. The relative weakness of bonds is potentially reflective of some liquidation of safe haven positions while the bounce in equities will be pressuring shorts. 

The MSCI Europe Index, which is not limited to Eurozone exchanges, retested the upper side of a 15-year range in April before pulling back to test the region of the 200-day MA. A sustained move below 130 would be required to begin to question medium-term scope for additional upside and a successful breakout to new all-time highs. 

The MSCI EAFE Index has been much less consistent but has at least stabilised in the region of the 200-day MA. A sustained move below 1850 would be required to question medium-term scope for additional upside.