• Exane BNP Paribas believes that European equities could come under pressure as the U.S. tightens monetary policy.
• The firm sees European equity valuations as “stretched” at current levels.
• Exane BNP Paribas does, however, see potential sources of leadership in European markets headed into 2016.

In a new report, Exane BNP Paribas analyst Paul Schneider takes a close look at the European recovery and whether or not European equities have more room to the upside. Schneider also names the firm’s top six Europe stocks to buy and top five stocks to avoid.

Vulnerable equities
Despite recent strength in the European recovery, Schneider isn’t particularly bullish in his European outlook. “The domestic European recovery continues but, as financial conditions tighten in the U.S. and structural challenges restrain EM growth, we think equity markets remain vulnerable, while European valuations offer little comfort at this stage,” he explained.

Domestic strength
Exane BNP Paribas sees an ongoing recovery in Europe, but it will be based on domestic strength. Schneider is looking toward stocks in media, luxury goods, consumer ingredients, beverages, utilities and real estate for leadership.

Stock picks
Exane BNP Paribas names the following six Outperform-rated European stocks as top picks:
AstraZeneca Plc (ADR) (NYSE: AZN)
Axa SA (ADR) (OTC: AXAHY)
Europcar Groupe SA
icap Plc (ADR) (OTC: IAPLY)
Munich RE
STMicroelectronics NV (ADR) (NYSE: STM)

In addition, the firm names five Underperform-rated value traps in Europe as well:
BAYERISCHE MOTOREN W (OTC: BAMXY)
Sandvik AB (ADR) (OTC: SDVKY)
SKF
UBS Group AG (NYSE: UBS)
Valeo, SA (EU) (OTC: VLEEY)

Disclosure: the author holds no position in the stocks mentioned.