Recession is “just round the corner” in the eurozone, says Jack Allen-Reynolds of Capital Economics. Weakening business surveys, higher gas prices and tighter monetary policy herald a tough second half.
The Euro Stoxx 50 index of euro-area blue chips has fallen 13% this year. European shares are out of favour with global money managers, says Michael Msika on Bloomberg. Allocations to euro-area equities have hit their lowest level since June 2012. Analysts at UBS think that European stocks are heading for their worst year since 2008.
Bavarian bargains
Still, a rally this summer has left some wondering whether the worst of the sell-off is over. The Euro Stoxx 50 has gained 11% since a low in early July. France’s CAC 40 has outperformed, says Bastien Bouchaud in Les Echos. With Italy facing political turmoil, Germany curbing gas use and the Spanish government hiking taxes, Paris appears a haven of relative “tranquillity”. Luxury fashion houses are raking in cash, with Hermès’ stock up more than 30% this summer. German exports are focused on China and Eastern Europe, while French firms have a more diversified set of clients, says Frederik Ducrozet of Pictet Wealth Management.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
With French stocks trading on a cyclically adjusted price/earnings (CAPE) ratio of 20.8 at the start of this quarter, however, the Paris bourse is getting as pricey as one of Hermès’ Birkin handbags. Value hunters should instead consider Germany’s battered industrial base. On a CAPE of 13.9, German stocks are now slightly cheaper than their British counterparts.
At those levels “you’re not paying for good news”, says Matt Burdett of Thornburg Investment Management. Recession risks are arguably priced in. Europe hosts plenty of excellent multinational businesses that will continue to make money overseas even if the local economy slumps.
The trailing price/earnings (p/e) ratio of eurozone equities “has plunged to just under ten, from a peak of over 25 a year ago”, say Claus Vistesen and Melanie Debono of Pantheon Macroeconomics. The region’s stocks “are trading at multiples close to the nadirs during the financial and sovereign debt crises, which were good times to invest in eurozone stocks”. While cheap stocks tend to mean better long-term returns, don’t bet the house on a quick turnaround: a recessionary hit to corporate earnings – which could fall 20% over the next 12 months – is likely to prove “a drag on equity performance” for the rest of 2022 before a rebound next year.
European value shares look especially appealing, says Ben Arnold of Schroders. They “are… trading on lower [p/e ratios] than they were five years ago”, a rarity in developed markets after years of easy money. “Europe is one of the most overlooked ... markets in the world. Perhaps not for long.”
-
Which investment trusts could benefit from lower interest rates?As vehicles for long-term investments, many investment trusts were hit when interest rates rose in 2022. With interest rates expected to fall by the end of the year, could now be the time to invest in one of these unloved sectors?
-
How to protect your personal and financial data from cyber attacksM&S and the Co-op are the latest retailers to suffer from cyber hacks but consumers also need to be vigilant
-
Herbert Diess: VW CEO runs out of roadNews Herbert Diess’s tenure at VW came to a premature end after he fell foul of the group’s powerful owners. Matthew Partridge reports
-
Ray Dalio’s shrewd $10bn bet on the collapse of European stocksOpinion Ray Dalio’s Bridgewater hedge fund is putting its money on a collapse in European stocks. It’s likely to pay off, says Matthew Lynn.
-
Macron has failed France – but there is still plenty to invest inCover Story Emmanuel Macron won a convincing victory in France's presidential election, but he has no clear vision for halting the country’s decline. Frédéric Guirinec looks at the state of France and picks 20 French stocks to buy.
-
An end to investing in RussiaNews Foreign investors have abandoned Russian markets - and index compiler MSCI could remove it altogether from its stock and bond benchmarks.
-
Russian stocks suffer as the world fears it will invade UkraineNews Despite a booming economy, Russian stocks look extraordinarily cheap – but if it invades Ukraine, the Russian stockmarket will become all but uninvestable.
-
French stocks are back in fashionNews France’s CAC 40 stockmarket index gained 29% in 2021, making it the world’s best performing major market.
-
Has Italy’s economy turned the corner?News Italy’s FTSE MIB stockmarket index has returned 23% so far this year, more than double the FTSE 100’s performance over the same period.
-
Dale Robertson: why Europe is a great place to be a stock pickerPodcasts Merryn talks to Dale Robertson of the Chelverton European Select Fund about the opportunities available to investors in European companies – especially in small and micro-cap stocks.
