Look for bargains in European stockmarkets

With the continent looking towards a robust recovery and markets at much lower valuations than the US, there are plenty of bargains to be found in European stocks.

The euro area is “nearing escape velocity”, says Christopher Graham of Standard Chartered. Economies have been gradually easing restrictions. France and Austria reopened restaurants last week, while Portugal and Italy are welcoming tourists from certain countries. The continent should enjoy a “robust recovery” now.

European vaccination rates picked up rapidly in April, says Ian Shepherdson of Pantheon Macroeconomics. More than half of the population should have had at least one jab by the end of June, only a month behind the US. Data from Israel suggests that “cases plummet… when vaccination rates exceed about 50%”.

Analysts turn positive

Germany’s Dax hit a new all-time high this week. Wall Street analysts are growing positive, says Sam Meredith for CNBC. Morgan Stanley thinks “Europe is well-placed to outperform all major regions this year for the first time in more than two decades”. With inflation anxiety affecting US markets, more US money managers are looking to the old continent. 

The MSCI EMU index has outperformed the MSCI USA index since “vaccine Monday” on 9 November 2020 (the date when news of the Pfizer jab broke), says Franziska Palmas of Capital Economics. While Europe’s recovery will be weaker than America’s, its shares should keep outperforming. 

US earnings forecasts are already very bullish, so a lot of good news is already priced in. In Europe a slower reopening has made analysts much more conservative, leaving room for positive surprises. 

European markets are also far cheaper than their US counterparts. As of the start of this quarter the US market was trading on a cyclically adjusted price/earnings (Cape) ratio of 36.1. By contrast, Germany was on 19.9, France on 22.6 and Spain on just 14.7, according to Mebane Faber of Cambria Investment Management. That discount partly reflects compositional differences. The US has more fast-growing tech firms, while Europe has more value shares, such as banks and industrial firms.  

Yet composition doesn’t explain the whole story. As Simon Edelsten notes in the Financial Times, even firms operating in similar industries are cheaper in Europe. Shares in German sportswear giant Adidas trade for “35 times this year’s earnings, but Nike in the US is on an eye-watering 42 times earnings”. The same is true of banks. 

But “before dashing across the Channel like an excited shopper hunting for duty-free Gitanes and Château Plonque”, remember that cheap shares are sometimes cheap for a reason. Europe’s very best businesses – those that operate in sectors such as luxury goods and green energy – are rarely the cheapest. “Don’t be afraid to compromise on price in favour of prospects.” 

Recommended

Key dates for 2023: here are the dates you need to know when it comes to your money in 2023
Personal finance

Key dates for 2023: here are the dates you need to know when it comes to your money in 2023

There is no shortage of important dates to be aware of next year – which are likely to affect your financial health. We run through the key dates in 2…
6 Dec 2022
What is a recession and how will it affect you?
UK Economy

What is a recession and how will it affect you?

The UK economy is heading towards a recession, according to economists. But what is a recession, and what does it mean for your money?
6 Dec 2022
Investment scams are infiltrating Facebook and Instagram
Investment strategy

Investment scams are infiltrating Facebook and Instagram

Research from Which? found hundreds of investment ads on Facebook and Instagram that could be misleading investors into potential investment scams.
6 Dec 2022
Is it a good time to buy an annuity as rates hit a 14-year high?
Pensions

Is it a good time to buy an annuity as rates hit a 14-year high?

Average annual annuity income has risen by nearly £1,000 since the start of the year. We look at whether now is a good time to buy an annuity.
6 Dec 2022

Most Popular

Is it cheaper to leave the heating on low all day?
Personal finance

Is it cheaper to leave the heating on low all day?

The weather is getting colder and energy bills are rising, but is it really cheaper to leave the heating on low all day or should you only turn it on …
1 Dec 2022
Radiator vs electric heater – which is cheaper?
Personal finance

Radiator vs electric heater – which is cheaper?

We compare the costs, pros and cons of radiators and electric heaters and see which one will help keep your energy bill as low as possible.
28 Nov 2022
State pension errors – why tens of thousands of mothers could be missing out on millions in state pension payments
State pensions

State pension errors – why tens of thousands of mothers could be missing out on millions in state pension payments

LCP launches Mothers Missing Millions campaign amid DWP state pension errors.
3 Dec 2022