With European stock markets trading at a 32% discount to the U.S., a March 21st report from Barclays suggests European valuations appear heavily discounted.
Barclays PLC (NYSE:BCS) analysts Ian Scott and colleagues also note valuations in emerging markets are low and their earnings are tightly linked to exports.
Bullish sentiment in global equities
The Barclays’ analysts point out that despite fears of a slowdown in China, political tensions in Ukraine and Fed tapering, stocks have been relatively resilient. The analysts believe global equities could rise further in 2014, though the outlook is complicated by the risk of a correction. They believe the bullish sentiment remains in place. They point out that the number of bears responding to the Investors Intelligence Survey is still very low at just 17%, and during the post-financial crisis era, this sentiment gauge has been a very good guide to forward returns.
The following table sets forth the analysts’ global index forecasts and total return expectations:
Global EPS growth to remain steady
The Barclays PLC (NYSE:BCS)’s analysts note recent earnings performance has been decidedly mixed. Though reported and forecast earnings have been growing steadily, the process is slower than bottom-up analysts had expected. However, the analysts haven’t altered their EPS forecasts with their global expectation for 2014 growth steady at 11%. The following table illustrates the Barclays analysts’ global EPS forecasts:
Overweight on Europe ex-UK
The analysts point out Europe ex-UK has outperformed the global index by 3.8% since their December 2013 outlook. Some of the factors supporting the analysts’ overweight position in this region include earnings improvements and low multiples, coupled with a hefty improvement in fixed income markets. However they note the main risk remains the stance of the ECB and its refusal to ease policy further, despite very low inflation and the ongoing strength of the euro.
The Barclays’ analysts note valuations in Europe are low. They point out that history suggests that the price/book multiple is the best guide to valuation in Europe relative to the U.S. They also argue that the current 32% discount indicates outperformance for Europe. The following graph captures the discount in European stock markets:
The analysts note similar discount levels in the past have led Europe to outperform the U.S.
The Barclays’ analysts are also overweight in emerging market equities despite their recent underperformance. They believe today’s crisis-level valuations imply negative earnings growth, which is unlikely given a sustained recovery in the global economy.