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Investing in European value? It's already gone
by David Campbell on Oct 16, 2013 at 13:20
Bubbling under for around nine months, the feeling that the tide has turned for European equity value hardened into consensus over the summer. Lipper’s Equity Europe sector grew by around 5% during August alone, with £10 billion in new money flowing into sector funds.
Anecdotal evidence suggests that interest has not slowed since, but with the Eurostoxx 200 index up by 5.7% over the third quarter versus a 1.95% dip in the S&P 500 and valuation metrics approaching something like historical parity, has the value gap already closed?
Readers of Wealth Manager have not been immune; overweight allocations to the sector more than doubled from 33.3% in Q2 to 68.4% in Q3, while the number of managers willing to risk an underweight dropped to zero.
‘So far this year, the inflows into equity markets have been into the US and Japan, but the trend has just started to shift, said César Pérez, chief investment strategist for EMEA at JPM Private Bank. ‘While we have already increased our allocation, global investors’ underweight to Europe has been a structural one.
‘We acknowledge it will take time to unwind this positioning, but the tide has begun to turn, creating what we view to be an attractive entry point for stock picking opportunities in Europe.’
That tide has arguably already lifted European equity markets above the obvious value arbitrage that may have existed three months ago.
On the broadest and most obvious measure, the Eurostoxx 200 index has risen to a price to earnings multiple of 14.69, versus the S&P 500 on 17.39. While that is still a discount, it is only fractionally off the 2.5 average discount to the US that Europe has traded at for more than 10 years.
With earnings revisions still deeply negative at a net -41% of recent reports versus broad earnings stability in the US, the relative disparity feels broadly right.
‘The solid outperformance of US equities over other regions over the last few years has primarily reflected stronger earnings growth rather than valuation,’ said Binky Chadha, chief global strategist at Deutsche Bank.
‘With the bottom-up consensus factoring in higher earnings growth in Europe, we expect relative earnings downgrades to continue. In contrast, earnings estimates for the US have stabilised, with negligible downward revisions.’
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