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How European Equities Compare to US Equities in 2016–2017

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Eurozone: Slow growth but attractive valuations

The Eurozone is expected to grow about 1.6% in 2017, according to the latest IMF (International Monetary Fund) update. The business cycle in the Eurozone continues to show slower growth but is expected to improve in 2017. The trend of cyclical improvement in developed economies has helped equities.

European stocks are expected to rise in 2017, but you need to be cautious of unexpected political outcomes in 2017. If the nationalist stance prevails in the 2017 elections in the Eurozone, many participants such as France and Germany could possibly leave the Eurozone. You can see the 2016 valuations in the Eurozone in the graph below.

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Valuations

According to Sam Stovall, CFRA chief investment strategist, developed markets such as Europe (FEZ) (HEDJ) currently provide attractive valuations for the following reasons:

  • Earnings growth in European equities is about three times more than US equities.
  • The PE (price-to-earnings) ratio is much lower for European equities than for US equities.
  • The dividend yield from European stocks is almost 50.0% higher than US stocks.

The overall sentiment for European equities is unfavorable due to the potential shift in the European political landscape. However, the fundamental backdrop looks promising against the political backdrop, as stated by Bob Doll, Nuveen’s chief equity strategist.

As you can see in the above graph, the PE ratio of the Euro Stoxx 600 is 15.2x, which is lower than the PE ratio for the MSCI World Index (or ACWI) and the S&P 500 (SPX-INDEX). As of February 2017, the PE ratios for the MSCI World Index and the S&P 500 (SPX-INDEX) were 16.6x and 18.4x, respectively.

The emerging market (EEM) provides the lowest valuation with a PE ratio of 11.9x. The top holdings of the Stoxx 600 as of February 28, 2017, include Nestlé (NSRGY), Novartis (NVS), Roche Holding (RHHBY), HSBC Holdings (HSBC), and Total (TOT).

According to Stovall and Doll, emerging markets can provide an excellent opportunity if you’re unsure about tackling the political uncertainty in Europe.

In the next part of this series, let’s look at the performance of emerging markets.

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