Is the eurozone gloom overdone?

Compared with US shares, European stocks haven’t been as cheap as they are now in a long time.

924_MW_P04_Markets

The eurozone remains "deep in Alice in Wonderland territory", says Liam Halligan in The Sunday Telegraph. The European Central Bank's (ECB) interest rate is still negative at -0.4%, while both the US Federal Reserve and Bank of England are in rate-raising mode. And the economic recovery appears to be fading. Euro area GDP only grew by 0.2% in the third quarter, the slowest pace in more than four years. In November a monitor of activity in both manufacturing and services, the composite PMI, slipped to a four-year low.

Mario Draghi, president of the ECB, is pinning some of the blame on Donald Trump's tariffs on European steel, notes Graeme Wearden in The Guardian. Draghi also cited "some country-and sector-specific factors". In particular, Germany's car sector has been subdued as production has been disrupted in the past few months.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Stocks have struggled...

Meanwhile, European exports have wilted in particular to emerging markets, where European firms earn a third of their profits, says Buttonwood in The Economist. Earnings forecasts have been reduced this year. Throw in political problems such as the spat with Italy and the lack of fiscal integration a step crucial to the survival of the single currency and it's no wonder European stocks have struggled. The Euro Stoxx 50 index of eurozone shares is lower than it was 20 years ago. (Include reinvested dividends, however, and you would be 50% ahead a stark reminder of the difference income makes.)

Still, the region is hardly a write-off. Growth may have slipped, but surveys point to a slight uptick this quarter. Morgan Stanley is pencilling in GDP growth of 1.6% in 2019, down from around 1.9% this year and 2.5% (a ten-year high) in 2017. Meanwhile, there has been "more progress than is generally recognised" on structural problems, reckons Buttonwood. The recent proposal for a European budget between France and Germany won't fix the euro, but could yet become a bigger and more flexible arrangement. And bank balance sheets, which have been repaired too slowly, are finally in reasonable shape.

Advertisement
Advertisement - Article continues below

... but the bad news is in the price

The broader point, however, is that the bad news is largely in the price. Compared with US shares, European stocks haven't been as cheap as they are now in a long time, Jens Ehrhardt of DJE Kapital told WirtschaftsWoche."There is currently too much pessimism, which is a good sign" for investors. The Euro Stoxx 50 index is on a price-earnings (p/e) ratio of 12 for next year, and yields 3.7%.

That looks much more appealing than next year's p/e of 15 for America's S&P 500 index. A trust that concentrates on blue chips is the Fidelity European Values (LSE: FEV). However, small-caps have done especially well over the past decade and are worth a look. Options include the JPMorgan European Smaller Companies (LSE: JESC) and the Montanaro European Smaller Companies (LSE: MTE) trusts. (MoneyWeek's editor-in-chief, Merryn Somerset Webb, is a non-executive director of the latter).

Advertisement

Recommended

Visit/517688/the-british-equity-market-is-shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stockmarkets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019
Visit/510135/trade-war-ceasefire-boosts-stockmarkets
Economy

Trade-war ceasefire boosts stockmarkets

Stockmarkets sighed with relief after the G20 summit in Japan brought a handshake between Donald Trump and Xi Jinping.
4 Jul 2019

Most Popular

Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Visit/economy/eu-economy/601060/the-european-central-bank-throws-away-the-rulebook-to-bail-out-italy
EU Economy

The European Central Bank throws away the rulebook to bail out Italy

The ECB has removed all constraints on asset purchases and will now buy “whatever it takes” to tackle the coronavirus. John Stepek explains what it me…
26 Mar 2020
Visit/investments/commodities/gold/601037/gold-is-on-a-wild-ride-so-should-you-be-buying
Gold

Gold is hard to find right now – so should you be buying?

With demand through the roof and the physical metal hard to find, it's not the best time to buy gold. But right now, says Dominic Frisby, you want to …
25 Mar 2020
Visit/economy/uk-economy/601063/the-uks-bailout-of-the-self-employed-comes-with-a-hidden-catch
UK Economy

The UK’s bailout of the self employed comes with a hidden catch

The chancellor’s £6.5bn bailout of the self employed is welcome. But it has hidden benefits for the taxman, says Merryn Somerset Webb.
27 Mar 2020