Cover of MoneyWeek magazine issue no 555

Currency wars

16 September 2011 / Issue 555

The best bets in the forex market


  • Cash in on soaring gold demand
  • Will planning reform ruin the countryside?
  • Splashing out on a £1 million bath


Europe: cheap for a reason

Eurozone equities are cheap. Should you buy eurozone equities? First let’s look at exactly how cheap they are. Look at the Shiller p/e (price/earnings) ratio for France and Germany, says Société Générale’s Dylan Grice, and you’ll see they are at levels not far off those of the crash of 2008 and the levels they hit in the 1970s.

Given that the Shiller p/e is one of the few historically successful predictors of long-term returns, that’s encouraging. We know that, in general, if we buy things when the Shiller p/e is low, we will make good returns over time. We can’t be sure of the short term, of course, but mostly at MoneyWeek we are investors not traders, so that doesn’t necessarily matter.

We also know that in the past “cheap stuff has outperformed expensive stuff pretty much regardless of the macro regime”. Events are unpredictable. The fact that valuations pretty much always revert to a mean over time is not. Look at it like this and it seems to make sense to jump into the market right now, particularly given that there are several good European investment trusts around trading on nice discounts – Fidelity European Values or the JP Morgan Smaller Companies European Trust (which is currently on a 20% discount to its net asset value), for example.

But I’m not sure you want to do so too enthusiastically.

• Read the full editor’s letter here: Europe: cheap for a reason.