Opportunities in Europe

Casual observers wouldn’t have missed the fact that European markets haven’t fared as well as those in North America in recent years.  At one point, the Dow was up around 250% from its low point in the midst of the Great Recession.  Whilst the German Dax and the UK’s FTSE did briefly touch all-time nominal highs, they haven’t performed quite as well.  Adjusted to inflation, the market price at the height of the dot com bubble were higher.

There are a number of reasons for this.  First, the US economy has consistently outperformed most major economies until a few years ago.  This was helped by the Federal Reserve’s Quantitative Easing program, which also fed into markets by improving company balance sheets – especially the banks.

Times have changed, however.  In the last 2 years, the UK has been the world’s best performing G7 country, averaging growth of around 3% per year.  Some of `sick men` of Europe have also showed signs of improvement, with Ireland recording 5% growth and Spain just behind.  The European Central Bank has finally, moreover, started to interfere in the bond markets just as Federal Reserve appears to be considering tightening.

Importantly, there does seem to be a lot of value in Europe.  I was looking at an incredible statistic in Hargreaves Lansdown recently.  The cynically-adjusted price to earnings ratio is now lower than it has been since the early 1980s.  In 2007, before the economic crisis, it was at 35, and the average has been 22.  Now, we are trading at around 12.  Such data should not be considered in isolation, but it does illustrate that Europe, alongside Japan and some emerging market, is starting to offer more value than North American equities.

In the short-term, markets are often moved by speculation, such as the dramas in Greece and China.  Ultimately, people shouldn’t forget that the European Union has a bigger economy than even America, and the types of companies that exist there are global firms that can be profitable even when markets at home are depressed.  Take a company such as AXA, originally a French company, but which now generates most of its income overseas. If the Front National win an election in France or the ECB puts out the wrong signals in relation to monetary easing, its share price, like all French equities, would get hammered, like the rest of the Eurozone and possible European shares in general.  This is despite the fact that such factors would barely dent its profitability in a global economy.  As ever, investors should bare in mind that they should be brave when others are fearful.