Europe’s Cheap Stocks Set For A Long Catch-up Rally

mario draghi

The euro is at eight-month highs against the dollar. It was given another boost Wednesday by news that Italy had averted the threat of snap elections , and the possibility that U.S. political gridlock may force the Federal Reserve to keep pumping money into the economy at full throttle. Draghi said he didn’t expect the U.S. to default — a risk if it doesn’t raise the limit on government borrowing later this month — and believes the government shutdown will be short-lived. “If it were to be protracted it would certainly be a risk for the U.S. and world recovery, so we have to have this present in our minds,” he said. Federal workers sound off on shutdown Draghi repeated previous guidance that interest rates would remain at current or lower levels for an extended period of time, but stressed there were other tools at the bank’s disposal, and none were off the table. Interbank lending rates remain higher than the ECB would like and lending to non-financial firms shrank further in August. Loans to households grew by 0.4%, but that rate has barely moved since the start of the year. Some economists now expect the ECB to launch a third long-term refinancing operation, or LTRO, before the end of the year to provide more cheap funds to eurozone banks. It used LTROs twice during the credit crisis, and banks in distressed economies such as Greece, Italy, Spain and Ireland drew heavily on the facility. “We have little doubt that the ECB will undertake a new LTRO,” noted Howard Archer, chief European economist at IHS.

Europe’s Record Jobless Rate Seen Resisting Recovery

Earlier this month, Air France-KLM (AF) Group, Europes biggest airline, scrapped a plan to break even at its main French unit this year, putting 2,800 jobs in the country at risk. While most Southern European economies are struggling to provide work for the unemployed, the jobless rate in Germany , the regions largest economy, remained at 6.8 percent in September, according to 31 estimates in a separate Bloomberg survey . Thats close to a two-decade low of 6.7 percent. The Federal Labor Agency is due to publish these data tomorrow at 9:55 a.m. in Nuremberg. Resurgent Economy A robust job market and Germanys economic strength in the midst of the euro areas debt crisis helped Chancellor Angela Merkel s Christian Democrats take the largest share of the vote in Sept. 22 elections. German retail sales rose 0.5 percent in August from July, the Federal Statistics Office in Wiesbaden said today. That missed the median estimate of a 0.8 percent increase in a Bloomberg News survey of 26 economists. Gross domestic product in the 17-nation euro economy grew 0.3 percent in the three months through June, the first quarterly expansion after six contractions. Economic confidence rose more than forecast in September, with sentiment improving in the industrial sector as well as in services, retail and financial services. Even so, euro-area inflation slowed for a second month in September, led by falling energy prices, according to data today. Euro-Area Inflation Consumer prices rose an annual 1.1 percent after a 1.3 percent increase in August, the European Unions statistics office said.

Europe’s Eroding Foreign Investment

If you’re talking about the recovery of value in Europe, it’s a five-year idea. It took five years to kill that view and it’s going to take years for it to come back.” In 2011, the only other time in the past decade when the price/earnings gap between growth and value was as wide as it is now, the broad market retreat started around three months after that gap began to close. That could be an indicator of when the broader market rally may run out of steam this time although not necessarily. In 2000 the gap between growth and value stocks was narrow yet the overall market downturn did not begin until around five months after the gap began to close. In the past five years the MSCI Europe Value Index has underperformed growth by nearly a quarter, in the run-up to the 2000 market peak, the gap between the two was less than 5 percentage points. SMALLER POOL In the current market rally – European stocks rose in 14 of the last 16 months and the STOXX Europe 600 index is up by around a third in that time, trading near five-year highs – the pool of obviously cheap, “deep value” stocks for investors to choose from has already contracted. The number of STOXX Europe 600 companies trading below their 10-year average price/earnings ratio has halved to around 270 over the past two years. On the flip side, investors’ aversion to companies exposed to the economic cycle during recent years has left many well-established companies with healthy balance sheets trading at lower valuations than the overall market. In these cases, the distinction between value and quality stocks has been blurred. “The opportunity is not so much in deep value but in relative valuation within the European equity space, where you have a lot of cheap cyclicals that you can invest in and benefit from the cyclical upturn,” said Manu Vandenbulck, senior investment manager at ING Investment Management. On a sector basis, energy and financials – the biggest weights within the MSCI Europe Value index – look the cheapest, followed by utilities and consumer discretionary shares. Investors, though, are using additional criteria to filter stocks that are cheap for good reason from those that may be unjustly discounted. ING Investment Management looks at sustainability of dividend payments, for example, while JPMorgan prefers firms well placed to ride Europe’s economic recovery. “That is banks, obviously, autos, part of construction, part of consumer cyclicals.

subprime market collapsed, the crisis spread to other major advanced economies and global FDI inflows shrank to $1.2 trillion in 2009. During the brief rebound, global FDI was driven by stimulus packages and recovery measures in the advanced world. But as these policies expired, so did the rebound. Accordingly, global FDI inflows plunged again to less than $1.4 trillion in 2012. Currently, observers anticipate a gradual rebound to almost $1.8 trillion around 2012-2015. In view of present realities in the West, that is aspirational but not necessarily realistic. Europes decline as investment destination comes after years of success. At the turn of the 2000s and 2008, the region was the main beneficiary of two boom-and-bust cycles. In the aftermath of the global crisis, Europe was able to reverse FDI inflows. But another plunge followed after 2010, when the region was swept by its sovereign debt crisis. Historically, most FDI in Europe has focused on Western Europe. In 1980, the latter accounted for more than 90 percent of FDI stocks, in contrast to barely 10 percent in Southern Europe. Last year, some 75 percent of FDI stocks were still in Western Europe rather than in Southern (15%) or Eastern Europe (9%). Unlike FDI stocks, which illuminate the past, the story of FDI flows, which reflect the present, is similar, but far more volatile.