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.
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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.”
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