September 25, 2022

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Markets: Europe is more promising than the United States

The market wonders if it is worth returning to it Focus on stock value Then, in the past decade, The investor in this type of asset has become an endangered species, which have been marginalized by the sporadic pursuit of unlimited growth in sectors such as high technology. A style that has underperformed for a long time (apart from a brief rally in the early part of 2022), and is characterized by a large gap between valuations of the cheapest and most expensive stocks. Today, however, value stocks are very affordable: in the US it has a price/earnings ratio (growth/value stocks) to a 20-year low. However, Ben Arnold, Schroders’ chief investment officer, notes that this spread in Europe is more pronounced. And the most surprising thing is that, unexpectedly, cheaper European companies saw higher earnings growth than more expensive companies.

Cheap stocks neglected in Europe

The past few years have been tough for cheap European stocks. A situation that can best be described with numbers. For example, the US Russell 1000 value index has a 12-month P / E of 16.5, while the equivalent in Europe is about 11. This huge difference, according to the expert, shows that Cheap American stocks are valued at much more than the cheap stocks of the Old Continent. The two points show that there are similar general themes on both sides of the ocean, but in Europe they are much more extreme. However, Arnold notes, given the EPS growth of Eurostoxx value and growth indicators since 2017, the first two points seem completely illogical. Over the past five years, cheaper European companies have seen higher earnings growth than their growing peers.

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The value has long entered a favorable stage

This dynamism is particularly evident in Europe, while it is virtually absent in other developed markets (starting with the US), where growth stocks have posted impressive earnings growth over the same period. Some might argue that this result is attributable to a positive base effect, since the calculation is made starting in 2017, only when the mining cycle becomes positive. However, Arnold points out that analyzing this situation over multiple time periods leads to the same result. It is also worth noting that the good period of value was already in place before Covid. But It’s not just about the recovery in profits, the rise in commodities and rates that favored value after the epidemic: in recent yearsSo, Real stocks are on the rise in Europeat least in terms of the basics, values ​​were.

market European Underrated, maybe not for long

In short, according to the expert Therefore, there is good reason to believe that the value in Europe is very interesting and undervalued today. In particular, he argues, there are absolute valuations near their lowest, record levels of relative discount on growth, and positive relative earnings momentum. This view, however, is not widely shared: Europe, in light of investor flows and allocations, is in fact one of the most neglected stock markets in the world. Probably, Arnold concludes, Not for long.