Political uncertainty in Europe has weighed on European equity valuations, especially with the Netherlands, France, and Germany all holding critical elections this year.
Lately, the cheapness of Eurozone relative to US equities has attracted the attention of investors and gotten lots of financial press.
Eurozone stocks have been performing well so far this year, yet valuations remain relatively attractive. In addition, the latest economic data out of the region show upward momentum.
In other words, the fundamentals are looking better for the Eurozone, while politics remain unsettled if not unsettling.
Let’s start with the former before moving on to the latter:
(1) Performance & valuation. During Q1, the performance derby among the MSCI stock price indexes for the major developed countries is as follows (in dollars, and local currencies): EMU (8.3%, 6.8%), US (5.7, 5.7), UK (3.9, 2.7), Japan (3.7, -1.0) (Fig. 1 and Fig. 2). The forward P/E of the EMU MSCI index is 14.5, which is well below the US at 17.9 (Fig. 3).
(2) Factory activity & prices. The Eurozone’s M-PMI (56.2) and NM-PMI (55.5) jumped to cyclical highs during March and February, respectively, according to Markit (Fig. 4). Chris Williamson, chief business economist at IHS Markit, observed that the six-year highs were evident across all key business activity gauges—output, new order inflows, exports, backlogs of work, and employment. The upturn was broad-based, with Greece being the exception to the strength. Business is so good elsewhere in Europe that suppliers are having trouble keeping up with demand.
Europe’s M-PMI performance derby shows Germany leading the way: Germany (58.3), Italy (55.7), UK (54.2), Spain (53.9), France (53.3). March data for the NM-PMI will be available on Wednesday. February’s performance derby for the NM-PMI showed Spain leading the way: Spain (57.7), France (56.4), Germany (54.4), Italy (54.1), and UK (53.3) (Fig. 5 and Fig. 6).
(3) Economic sentiment. Europe’s economic sentiment indicator (ESI) is also upbeat. During March, the European Union and Eurozone ESIs were at cyclical highs (Fig. 7). The latter is highly correlated with the y/y growth rate of real GDP in the Eurozone, which was 1.7% during Q4 (Fig. 8).
(4) Forward revenues and earnings. Industry analysts have turned more optimistic on the outlook for both revenues and earnings of the EMU MSCI stock index (Fig. 9 and Fig. 10). Both have turned up on a 52-week forward basis. Revenues are expected to increase 4.9% this year and 3.5% next year, while earnings are expected to rise 13.3% this year and 10.5% next year.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.