By the Numbers
January 9, 2016
84 — Number of months international stocks have trailed U.S. equities since the global financial crisis
What do European stocks have in common with goods sold in discount stores? You might be surprised.
If you look hard enough in discount shops, you might find items that cost considerably more elsewhere. Likewise, Europe could be the place to find good deals.
A weak economy and political turmoil have weighed on European stocks since the 2008–2009 global financial crisis. In fact, for the past 84 months, the MSCI EAFE Index, which tracks large and mid-cap stocks across 21 developed countries in Europe, Australasia and the Far East, has trailed Standard & Poor’s 500 Composite Index on a rolling three-year returns basis.
Now, however, certain European companies appear to be attractively valued when compared to their U.S. competitors. For example, French financial services conglomerate BNP Paribas was trading at a 12-month forward price-to-earnings (P/E) ratio (the price of a stock divided by its earnings per share) of 9.2 as of September 30, 2016. Meanwhile, U.S.-based JPMorgan Chase had a 12-month forward P/E ratio of 11.1.
European corporate profits could escalate this year as businesses stand to benefit from rising commodities prices, strength in a number of emerging markets countries and corporate belt-tightening. Though still faced with regional challenges, select European companies are overcoming them.
“Europe faces a great deal of political and economic uncertainty. But if the euro holds together, the European market’s valuation differential with the U.S. will not be justifiable,” stresses Andrew Suzman, portfolio manager at American Funds. “When you have political stability, share prices can improve very quickly. We should get much more clarity on this in the coming months.”
Nonetheless, there are still headwinds to consider. Economic growth in the euro zone remains sluggish. The ongoing consequences of the Brexit and Donald Trump’s presidency could further destabilize the region. Even so, in a beaten down European equities market, there might just be bargains waiting to be discovered.
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