Valuations continue to rise
European index (EFA) valuations reached a new high recently, hitting 15x on a one-year forward earning basis. Europe equities have rallied quickly so far this year, primarily as a result of the quantitative easing program introduced by the ECB (European Central Bank). Valuations improved by 1.56% in early April, spurred on by higher-than-expected German industrial production, a weakening euro, and stable inflation. Quantitative easing measures are useful instruments for central banks and governments across the globe when dealing with recession or downturns.
EU recovery following the 2007 crisis has lagged that of the US (SPY) and emerging markets (EEM). But corporates are expected to report record growth in the current fiscal to support the higher valuations seen recently. Overall growth in the region should encourage additional investment in EU equities. EU equities are currently trading at a marginal discount when compared with the US market.
Impact on asset managers
Major asset managers that will be impacted by EU equities include BlackRock (BLK), Allianz Group (ALV), Deutsche Asset & Wealth Management (DB), Vanguard, BNP Paribas (BNP), and UBS Group (UBS). Active asset managers are placing their bets on energy, infrastructure, manufacturing, and retail in the EU region. The overall improvement in the performance of EU equities will be beneficial for passive asset managers sponsoring ETFs.
The ECB’s quantitative easing has already helped corporates. A weaker euro and cheap financing is beneficial for exporting nations such as Germany. Where EU retail sentiment goes now will be a key indicator for EU equity investors to watch.