European equities still offer value

Despite recent rally, European equities offer value as earnings pick up speed

Although European equity markets have outperformed the US and other developed market regions since the start of this year, Invesco Perpetual’s European equity experts continue to see value in European equities, but caution that opportunities now exist largely on a stock-by-stock basis. In their view, selected peripheral countries still offer value for stock pickers, while opportunities in markets like Germany and Switzerland, which are now trading above their long-run averages, have become increasingly sparse.

As they point out, the plunge in oil prices, a weaker euro, the ECB’s quantitative easing programme and surprisingly robust macro data have strengthened the European picture, but the past year’s bearish tone of opinion towards the European economy has kept expectations suppressed so far. “That is exactly why we see reasons for optimism from here,” Invesco Perpetual’s Henley European Equity Team says in its latest market commentary.

GDP growth forecasts for the Eurozone have been upgraded and the ECB’s bond purchases seem to be feeding through into the real economy, with signs of overall credit conditions continuing to ease and remaining supportive of a sustained economic recovery. Composite euro-area PMI numbers have confirmed this expansionary trend, and although headline inflation has slipped into negative territory, core inflation has remained robust, with lower oil and food costs fuelling private consumption. On a political level, Invesco’s European equity experts continue to believe that a Greek exit would be bad news for the Greek economy, but that the risk of contagion for the rest of Europe has been significantly lessened in recent years, thanks to a much stronger institutional framework in the Eurozone and less involvement in the Greek economy by corporates based elsewhere in Europe.

Countering arguments that the recent rally has caused European equities’ forward PE to approach – or even exceed – fair value, the investment experts point out that the PE multiple has been driven by a rise in the ‘P’. “A rise in the ‘E’ can result in markets continuing to go up given the improved economic backdrop while the forward PE multiple can come down,” they note. In their view, several factors support an optimistic earnings outlook: For one, a sustained euro exchange rate around current lower levels provides a meaningful tailwind to European corporates. In addition, the significant reduction in oil prices, a major input cost for most corporates, has been a big cost saving. And, finally, record-low bond yields mean that corporates looking to refinance are able to do so at ever more attractive rates.

Jeffrey Taylor – Head of the European Equities team at Invesco Perpetual