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Europe Is An Improving Story

May 16, 2017 / International, Asset Class Research

With negative headlines around everything from refugees to elections to the euro, you could be forgiven for thinking Europe is still in crisis mode. The truth is negative headlines can obscure the larger picture.

Here are three reasons to stop discounting Europe:

  • Green shoots. Europe’s economic picture is brightening. A quick review: The continent’s economic woes date to the 2008 financial crisis. While still reeling from that disruption, a number of Europe’s economies plunged into a debt crisis sparked by factors including risky loans gone bad and the bursting of the housing bubble. At the time, fears that Greece and Ireland, in particular, would default on their government debt and/or be forced to withdraw from the European Union were widespread. The austerity policies in vogue in several countries led governments to drastically cut spending in an effort to reduce budget deficits—prolonging the economic slump.

    Fast forward to today. The European Central Bank recently increased its economic growth forecasts for the eurozone for this year and next. Across the bloc, banks are largely well capitalized and ready to lend, and unemployment has fallen to multiyear lows. Worries over deflation also seem to be subsiding as inflation has begun to pick up.
  • Growing bottom lines. As the overall economy recovers, so do company finances. Profit numbers have been surprising to the upside. In response, analysts’ forecasts for corporate earnings have increased from single digits to double digits. Add to that another, often overlooked factor—most European multinationals generate a significant amount of their revenue from countries outside Europe. These companies stand to benefit not just from stronger growth among the eurozone’s roughly 330 million consumers, but also from a global economy that is growing.
  • Good value. When we assess the attractiveness of different stock markets, we look at cash flows, earnings growth, and price-to-earnings multiples, among other metrics. By these measures, European stocks trade at attractive valuations relative to U.S. stocks. Companies in the STOXX Europe 600 and MSCI Europe indexes trade at around 14x forward earnings versus multiples in the 20x range, a historically high market P/E, for U.S. stocks. And European stocks are not only cheap relative to U.S. stocks, they are also cheap relative to their own historical valuations.

None of this means it will be all clear sailing ahead. Fears over the future of the European Union may have diminished following far right candidate Marine Le Pen’s electoral loss in France. However, risks of a breakup are still relevant—and were incorporated into the scenarios we took into account when deciding on our portfolios’ investments in European stocks—but we are convinced they are outweighed by the compelling long-term opportunity. Based on the first quarter’s stock returns, markets are starting to bear that out. With the economy recovering, and the euro’s cheap valuation, we’re also now comfortable moving to an unhedged position.

As we’ve seen, particularly as of late, investor sentiment can shift quickly. Sitting on the sidelines waiting for the perfect moment to invest is a good way to miss opportunities, particularly in a market the size of Europe’s. We are constantly reevaluating our views, and we’re willing to ride out short-term swings as long as we believe they will play out in the long term. That’s also how we approach wealth management in general, always considering the bigger picture and how the individual pieces will work together to help our clients reach their goals.


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