Three reasons why Europe is the place to invest next year

It’s time to invest in Europe, top investment banks say.

While the region’s stock markets massively disappointed in 2014, a lot is falling into place — lower oil prices, a weaker euro and possibly more easing from the ECB — that should make the continent one of best places to put money next year, their analysts note.

“Europe was a market ‘darling’ this time last year, then became a pariah,” economists at Morgan Stanley said in their year-ahead outlook. “[Now] we like European equities, (especially cyclicals) and European ABS.”

Mislav Matejka, chief European equity strategist at J.P. Morgan, goes as far as to predict eurozone equities will outperform U.S. stocks next year.

Not all investment banks keep targets for the benchmark Stoxx Europe 600 index SXXP, +0.38% But by pulling together data from their year-end outlooks, a picture emerges: The lackluster showing by the Stoxx 600 in 2014 could be turned into a 13% improvement in 2015.

To dig a bit deeper, the slides below look at the sectors tipped by banks, their targets and what the must-avoids in Europe are for investors in the coming 12 months.

Loose monetary policy from the European Central Bank: ECB President Mario Draghi has already hinted the eurozone’s central bank is looking at introducing some sort of further stimulus in early 2015, possibly sovereign-bond purchases. The ECB intends to add about €1 trillion to its balance sheet over the next few years, and the extra liquidity pumped into the financial system is expected to beef up equity prices.

“The mantra is ‘Don’t fight the ECB’ — the central bank is set to inject €1,000 billion and to add sovereign bonds to its buying program,” analysts at Société Générale said in their year-ahead report published earlier in December.

A cheaper euro: The shared currency slumped almost 10% against the dollar in 2014, but the slide is not over yet, according to the wider analyst corps. The euro stands to lose 6% by the end of next year, pushed lower by the ECB’s aggressive stance on easing. A weaker currency usually benefits exporters, as their goods become cheaper for foreign buyers.

Morgan Stanley estimates that the currency tailwind will add at least 2% to earnings per share for European companies next year. Overall, Morgan Stanley estimates that European earnings will grow by 10% in 2015, but that estimate also reflects falling energy costs and lower borrowing costs.

Lower oil prices: These will still be making a splash in the new year. The price drops should translate into a smaller slice of consumer paychecks going to pay gas and energy bills — and that means more income to spend on something else. This should help spur growth not just in Europe, but across the global economy, analysts say.

Additionally, lower “input” costs — that is, expense of raw materials and energy — should benefit companies’ profit margins and help lift their earnings. But the commodity sector, and oil-related companies in particular, are likely to feel the squeeze from the oil-price plunge.