Yahoo Finance Why European Stocks Could Outperform
How Europe’s QE Could Be a Stimulus for US-Based Investors (Part 5 of 8)
Stocks still cheap
As Europe begins its recovery, its stock valuations appear attractive compared to U.S. equities. According to MSCI data, Eurozone stocks are currently at a 40% discount, in price-to-book terms, to the U.S., which looks good compared to the long-term average of approximately 35%.
And German stocks look even better when compared to the rest of Europe. Germany currently sits at a 15% historical price-to-earnings discount to the eurozone and at a 32% discount relative to the U.S. (MSCI) According to Bloomberg, German companies also have strong balance sheets, holding approximately one-quarter of Europe’s cash. This could encourage them to issue debt and retire stock, which should be good for equity returns.
Market Realist – European stocks could outperform as QE acts as a tailwind for stocks.
The graph above compares the price-to-book ratio (PB ratio) of the MSCI EMU Index (EZU)–which tracks the stocks from the European Monetary Union (or EMU)–with that of the S&P 500 (SPY) (VOO). The PB ratios for the two stand at 1.8x and 2.9x, respectively. While a relatively low valuation could represent a value trap, there could be a case or two made for European stocks.
Firstly, the QE program, which is slated to continue for another 18 months, is positive for European stocks, as yields are driven lower and become increasingly more unattractive for yield-hungry investors. The S&P 500 gave returns of ~47% during QE3 (the third round of QE) alone.
Secondly, if the QE program is successful in boosting growth in the economy, European equities (VGK) could continue to perform well. We have recently seen green shoots of growth in the European economy.
The graph above compares the price-to-earnings ratio (or PE ratio) of the MSCI EMU Index with the MSCI Germany Index (EWG). Germany is much cheaper than the rest of the Eurozone, with PE ratios of 20.7x and 25.3x, respectively.
Germany is an engine of growth and the biggest economy in Europe. Germany is showing signs of improving, with inflation inching up and positive growth at 0.7%.
As the German economy continues to improve, you should see capital expenditures rising, as German companies are sitting on a lot of cash.
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