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Why European equities are on the rise
Asian investors would do well to look at European equities for investment opportunities as share prices have been rallying despite uncertainties over Brexit and forthcoming elections.
Bayani S Cruz 23 Mar 2017

Asian investors would do well to look at European equities for investment opportunities as share prices have been rallying despite uncertainties over Brexit and forthcoming elections.

This is because new macro-economic data has been stronger than expected, providing better prospects for the region as well as for equity investors.

Data from the European Central Bank (ECB) indicate that the economic recovery in the euro area is projected to firm up further, at a pace slightly above previous expectations. Real GDP rose by 0.4% in the fourth quarter of 2016 with the recovery, and is becoming more broad-based, both across sectors and across countries within the euro area.
Real GDP is expected to grow by 1.8% in 2017, by 1.7% in 2018 and by 1.6% in 2019, driven by domestic demand including robust private consumption and a positive contribution from investment, according to the ECB.

In recent weeks, global fund managers, particularly Goldman Sachs and JP Morgan Asset Management, have issued positive outlooks for European equities saying their performance may exceed US equities in 2017.

Deutsche Bank Wealth Management, in its weekly CIO report, says European shares are still cheaper than US equities based on profit multiples even as the valuation gap begins to narrow.

“The Stoxx 600 trades at about 15 times forward earnings, versus an S&P 500 Index multiple of almost 18. European equities have also profited from rising earnings. IBES (International Brokers’ Estimate System) consensus 12-month forward EPS (earnings per share) have rebounded by 9% from their mid-2016 lows,” says the Deutsche Bank report.

Given the stronger macro-environment and the weak euro versus the US dollar, there appears to be room for further European earnings improvement. Compared with their own history, European price/earnings (P/E) multiples seem rather on the expensive side.

“Relative to their US peers, however, European P/E valuations are rather inexpensive. If we also look at the price/book (P/B) values in both markets, we see that European equities are on historically very attractive price levels relative to US equities,” says Deutsche Bank.

The bank, however, warns that valuation numbers are not a good timing indicator of changes in market direction.

“From a tactical point of view the market currently looks stretched after its recent rally. While technical indicators and political uncertainties suggest that the current entry point for European equities may not be optimal, their longer-term potential looks promising with an improvement in earnings dynamics and attractive relative valuation levels.”

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