European Stocks Upgraded by JPMorgan on U.S. Growth

European stocks were upgraded by strategists at JPMorgan Chase & Co. on expectations that U.S. economic growth will pick up without stoking inflation.

The third-biggest U.S. bank raised its stance on the region's shares to ``neutral'' from ``underweight,'' JPMorgan strategists including Mislav Matejka wrote in a research note dated yesterday.

``We see potential for equities to overshoot our targets over the next few months,'' the strategists said in the report. ``The improving growth-inflation tradeoff will be supportive of near-term equity performance.''

JPMorgan expects economic growth in the U.S., Europe's biggest trading partner, to accelerate to 3.5 percent in the third quarter this year from a 2 to 2.5 percent pace of expansion in the past two quarters, according to the note.

Federal Reserve Chairman Ben S. Bernanke said on Feb. 14 U.S. inflation may be moderating because of declining energy and commodity prices. The comments suggest the Fed won't increase interest rates anytime soon.

``The Fed is sending dovish signals,'' the JPMorgan strategists wrote. The bank expects the next interest-rate increase in the U.S. in October.

Industry Upgrades

JPMorgan raised its recommendation for ``consumer discretionary'' stocks to ``overweight'' from ``neutral,'' according to the note. The bank also maintained an ``overweight' stance on shares of media and continental European retailers. An overweight recommendation means investors should own more of the stocks than are represented in equity benchmarks.

The bank also moved automakers to ``neutral'' from ``underweight,'' while it upgraded hotels and leisure to ``overweight'' from ``neutral.''

Not everyone shares JPMorgan's new bullishness on European stocks. Goldman, Sachs & Co., the world's biggest securities firm by market value, said in a Jan. 19 report stocks in the region may face a temporary slump in the ``near term'' because of investors' complacency about prospects for growth in the U.S.

Matejka, who joined JPMorgan in 2000, wrote in a June 20 report that European stocks may fall until the end of the year because inflation, rising interest rates and slowing economic expansion are likely to limit corporate earnings growth.

The Dow Jones Stoxx 600 Index, a pan-European equity benchmark, rose 17 percent between the publication of that report and the end of 2006. The measure has climbed 4.4 percent this year, beating a 3.8 percent advance by the Morgan Stanley Capital International World Index.

source:www.bloomberg.com