Seeking value? Take a look at Europe’s markets

Seeking value? Take a look at Europe’s markets

by John Manley, Wells Fargo Asset Management

When I was a young man, one of my first mentors told me that “sometimes you buy stocks when they’re down so you don’t get tempted to buy them when they go up.” Those words seemed wise then, and they may be particularly appropriate today when it comes to market conditions in the U.S. and in Europe.

U.S. stocks are getting the headlines, and they seem to deserve them. Most major American equity indexes are at, or very near, new all-time highs. I don’t see much wrong with that. People fret about valuations, but the S&P 500 Index is currently trading at about 17 times forward consensus bottom-up earnings expectations (the average of the past 20 years is about 16.5 times).

There is constant speculation on when the Federal Reserve (Fed) will raise interest rates, but I think that Chair Janet Yellen won’t hike until she is absolutely sure that a rate increase will not adversely affect our economy. In other words, I suspect the Fed will be far more likely to encourage than discourage domestic growth in the year ahead. That should be good for domestic stocks.

Finally, after almost two years of stagnation, consensus earnings expectations appear to have begun to rise. This seems particularly true for mid-cap stocks. Again, this could pull investors who have stayed on the sidelines into American stocks. Better earnings are the stuff that investor enthusiasm is made of.

This sounds good to me. However, we shouldn’t take our eyes off Western Europe, where Brexit has unsettled investors and growth has been hard to find. I ask you to glance at the bar chart below. As you can readily see, the markets are still 5% to 25% off their old highs, looking at data as of market close on 8-5-16.

 

blogchart_20160808

Things have diverged, and they may do so for a while longer. Still, better growth can be contagious in Western Europe, and massive stimulus from the European Central Bank (ECB) should push a lot of money into the region’s capital markets. I suspect that the ECB’s stimulus push will endure until it generates some of its desired effects. Stocks in Europe can play catch-up, and that wouldn’t be bad either.

Keep your eyes open for progress on Brexit. I suspect it will be more like a case of the hiccups than a serious malady. From time to time, we’ll experience a little shudder, but then conditions will grow calmer. Look for the Bank of England and the ECB to keep the system very pressurized to prevent missteps. I think European bank stocks, in general, have been overly traumatized by Brexit fears. They may face some dislocations, but I think that current valuations more than reflect this. Look for value; that’s what Europe seems to be specializing now.

 

Benchmark definitions:

Euro Stoxx 50 Index
The EURO STOXX 50 Index, Europe’s leading Blue-chip index for the Eurozone, provides a Blue-chip representation of supersector leaders in the Eurozone. The index covers 50 stocks from 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

FTSE 100 Index
The FTSE 100 index consists of 100 blue-chip stocks that are traded on the London Stock Exchange.

Swiss Market Index
The Swiss Market Index is an index of the largest and most liquid stocks traded on the Geneva, Zurich, and Basel Stock Exchanges.

German DAX Index
The German DAX is a stock market index that contains 30 of the largest and most liquid German companies that trade on the Frankfurt Stock Exchange.

IBEX 35 Index
The IBEX 35 is the official index of the Spanish Continuous Market. The index is comprised of the 35 most liquid stocks traded on the Continuous market. It is calculated, supervised and published by the Sociedad de Bolsas. The equities use free float shares in the index calculation.

CAC 40 Index
The CAC 40 is the French stock market index. It consists of the 40 largest French stocks based on market capitalization on the Paris Stock Exchange.

You cannot invest directly in an index.

 

Copyright © Wells Fargo Asset Management

Total
0
Shares
Previous Article

Is the Past Month Just a Counter-Trend Rally or a Start of a New Trend?

Next Article

HOME DEPOT INC (HD) NYSE - Aug 09, 2016

Related Posts
Subscribe to AdvisorAnalyst.com notifications
Watch. Listen. Read. Raise your average.