With all the recent headlines surrounding the U.S. fiscal cliff, investors may be wondering what happened to the crisis in the Eurozone. The crisis has continued to drag on and is by no means over, despite the recent lack of coverage. High debt levels combined with fiscal austerity will likely keep European economic growth weak for the foreseeable future.
Good news has emerged from the continent recently, however, as policymakers have begun to take key steps to resolve the crisis. Italian and Spanish sovereign debt spreads have fallen, and volatility has remained subdued in European stock markets. The German government recently approved a revised bill on Greek aid. The European Central Bank has also voiced its intention to use virtually unlimited means to support the single currency. European leaders appear to have taken the “Lehman Moment” off the table.
As this week’s OppChart illustrates, this recent bout of good news has not been reflected in European share prices. One measure I have found helpful in evaluating European markets is the cyclically adjusted price-to-earnings ratio (CAPE), which takes the price of a market and divides it by 10-year average inflation adjusted earnings, and which typically provides a less volatile measure of current valuations. The CAPE for the MSCI Europe ex. UK Index1 (designed to measure equity market performance of European markets and excludes the United Kingdom) is 12.9, which is 36.5% below the historical median of 20.3.2 The equity markets in peripheral countries are trading at even deeper discounts. The MSCI Spain Index, for instance, has a CAPE of 8.0,1 which is an almost unheard of low. While we advocate a company, not country, strategy for investors, these multiples, combined with an improving picture in many European economies, indicate that some very good European companies may be trading at bargain prices.
- The index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any fund. Past performance does not guarantee future results.
- Ned Davis Research, as of 12/3/12.
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