We update our readers on Morgan Stanley (NYSE:MS)’s latest European Equity Strategy, as it releases. The latest report, out on September 21′ 2012, gives a useful and comprehensive roundup of the region’s economy for the year so far. The analysis is based on sectors, styles, countries, valuations, earnings, and also estimates for the future growth and earnings. The best valuation metric is EV/EBITDA.
Looking at the performance on a year to date regional index scale, iShares MSCI Belgium Investable Mkt (ETF) (NYSEARCA:EWK), Denmark (BATS:EDEN), and iShares MSCI Germany Index Fund (ETF) (NYSEARCA:EWG) have been strong performers, where the return in USD has grown by 31.8, 26.6, and 20.7 percent respectively. The laggards have been, Greece Global X Funds (NYSEARCA:GREK), down with -18.7 percent, and Portugal and iShares MSCI Spain Index (ETF) (NYSEARCA:EWP) with -6.0 and -6.3 percent.
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We have discussed how Greek stocks are considered cheap, as compared to all other European equities, in a similar report by Morgan Stanley. The metric is still the same, and Greek and Italian stocks remain inexpensive buys.
The P/E ratio for Greece is up from the estimate of 6.3 in July’s report, to 8.6 in the present analysis. Spain and Italy have also improved with a present P/E of 13.9 and 9.9. Again, the cheapest countries by the PE metric are Italy and Greece, by MS forecast. While Denmark (18.4), Ireland (22.0), and Finland (19.9) are the most expensive among European countries. Since our last report, Spain’s PE of 13.9 is now above Germany’s 11.3. The dividend yields are the highest in Portugal, Finland, Greece, and Spain, lying in the range of 4.7-5.5.
The EV/EBITDA ratio is up from July’s 2012 estimate of 3.7 to 5.4 for the present. Similarly, Spain and Italy also grew to 6.7 and 4.1, from 5.7 and 3.8 in July. Countries with EV/EBITDA ratios greater than 9.0, are Switzerland, Ireland, and Belgium.
For 2012, EPS estimated growth will be negative for Finland, France, Greece, Spain, Ireland, and the UK. The largest declines are in Finland, with 40 percent, Spain with 36.8 percent, and Greece with 16.9 percent. However, large positive trends are seen in Austria, Belgium, and Denmark. No other country is expected to have EPS growth above 7.7 percent for 2012. The Sales growth margin is expected to be negative for Finland, Greece, Austria, and the UK.
Countries like Portugal, Greece, Austria, Italy and Norway are moderately owned but are cheap. The cheapest overowned country is France, while Germany is the most expensive overowned economy.
By sector, Consumer Discretionary, Industrials and IT are the most overowned. Financials lie in the cheap underowned quadrant.
The update expects the IT sector to achieve the largest EPS growth over the next ten years. Sectors like Telecom, Energy, and Financials may slump into negative growth.