Is the eurozone gloom overdone?

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


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.

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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.

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... 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).



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