European equities: Back to basics

In the aftermath of the French election, European assets are now in a sweet spot of reduced political tail risks, strong economic fundamentals and relatively easy central bank policy Adding cheap valuation to the mix, the conditions are in place for European equities to outperform their global counterparts. Admittedly, optimism on European equities is not a new story. But for a long time this optimism has resulted in cheap talk: There seemed to be a lack of conviction behind investors’ positive view of the region. 


Strong economic momentum with growth above US levels and favourable valuation on various metrics has not been enough to trump underlying scepticism among investors Based on classic valuation metrics like price to book values (P/B), European stocks look cheap. Europe is currently 3% cheaper than its long term median P/B, whereas the US is 10% more expensive. When looking through cyclical swings in earnings relative to prices (Shiller P/E), European companies trade 5% below their average, becoming historically cheap relative to their US peers which trade 38% above their average. But instead of bargain-hunting, investors have remained largely on the side-lines in recent quarters.