Why Europe? Why Now?

Why Europe? Why Now?

Earnings and Margins Recovery

  • MSCI EMU earnings and profit margins are significantly below previous peak levels, offering recovery potential. Earnings and Margins should improve with business confidence.
  • The IFO institute’s business climate index for Germany climbed to 108.3 from 108 in July. The Bundesbank said in its August monthly bulletin that the German economy is poised for “solid” growth in the rest of the year. Domestic spending, bolstered by record-low unemployment and borrowing costs, could provide a bulwark against weakness in China
  • Euro-area exports to China were 6.8% of total euro-area exports to the world in 2014

Strong Balance Sheets

  • European Bank balance sheets have stopped contracting and are quite healthy post AQR
  • Euro Area companies have historically high cash positions
  • The supply of credit is close to post-2007 highs
  • The ECB bank lending survey indicates that EMU private banks expect a pick-up in demand for loans.

Attractive Valuations

  • Entering 2015, the European CAPE (Cyclically Adjusted P/E) relative to global equities was at an all-time low – 1.8std below average.
  • The weaker euro is helping earnings, as nearly 60% of revenues are coming from outside Europe. A 10% fall in the euro trade-weighted index is estimated to add about 8% in European EPS
  • The fall in the euro area BBB corporate bond yield suggests that the interest charge could fall by 40bps and the ECB measures so far are helping to repair the monetary transmission mechanism (with bank lending rates, for example, falling in the periphery). This could add 11% to EPS

 Economic Turnaround

  • According to OECD and IMF models, the depreciation of the euro, combined with the fall in oil prices could boost European GDP.
  • First quarter GDP growth recorded a comfortable 0.4% qoq (non-annualized) print, the EMU’s highest in recent years, borne by sturdy consumption and exports. In nominal terms, the 2.35% growth is the highest print recorded since Q3 2011.
  • The recovery has potential to carry on in an environment where activity should be propped up by the still supportive low rates, weak Euro and cheap oil.
  • Fiscal drag is easing and there is substantial pent-up domestic demand – Entering 2015, car sales were 27% below their pre-crisis average (back at 1993 levels), the net business investment share of GDP is a third of normal levels, the age of the capital stock is close to record levels, while household savings ratios are still high in the core (and 12.9% in the Euro area as a whole).

Disclosures: This piece was written by a Senior Portfolio Manager at Accuvest Global Advisors. The opinions expressed in this report are those of the author. The materials and commentary are strictly informational and should be used for research use only. This brochure should not be construed as advertising material. The opinions expressed are not intended to provide investing or other advice or guidance with respect to the matters addressed in this brochure. All relevant facts, including individual circumstances, need to be considered by the reader to arrive at investment conclusions to comply with matters addressed in this brochure. Past performance is not indicative of future results. Remember that investing involves risks, as the value of your investment will fluctuate over time and you may gain or lose money. Investment risks are born solely by the investor and not by AGA. AGA is an independent investment advisor registered with the SEC. All disclosures, marketing brochures, and supplemental firm sheets are available upon request.

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