Most analysts are bullish on equities for 2014, but there is still the question of which markets are best positioned to benefit from the recovering economy. US equities have probably had as much re-rating driven growth as they can stand this year, and European stocks may be relatively cheap even if they no longer have the low multiples that have characterized them for the last few years.
“Not so long ago, there was a strong and consistent value case that could be made for equities. UK and European equities looked cheap in absolute terms on most/all measures and super-cheap in relative terms on most/all measures,” writes Jonathan Stubbs, but he says that European equities still come up as “not cheap, fair value and super cheap on different valuation metrics.”
Europe’s lagging recovery a factor
Europe’s recovery has lagged behind the US so it’s no surprise that stock price growth has also been slower. Relative CAPE is well below the long term average and at one of the lowest points in the last thirty years. As long as the European recovery continues next year, there appears to be more room for price growth in Europe than in the US.
Long-term CAPE: European Equities overview
Looking at long-term CAPE and PBV (price/book value) also gives a compelling argument for investing in European and UK equities. PBV is in line with the long-term average, as opposed to many other regions where stocks look overpriced, and long-term CAPE is actually well below the historical average. While European equities’ long-term CAPE has recovered somewhat it is still lower than at any point before the crisis.
Having said that, the most common valuation method, PE, tells a different story. European equities’ PE is above the long-term average and the slightly higher post-1990 average. “While the absolute valuation case has become more mixed for European equities, the relative case remains very attractive,” writes Stubbs.
Stubbs isn’t bearish on US equities by any means, but for value investors who don’t want to get involved in a market with high valuations and incredibly low PE dispersion, Europe may give a better chance of finding attractive deals than the US right now.