In-depth Analysis

Are European Markets Cheap For a Reason?

If you are anything like me you have probably been paying more attention to what’s been going on in US equity markets this year, than you have in the UK or Europe. 

However, as we enter Q4 things are hotting up (or not, as the case may be) on the continent  and as they do European equities are falling to their cheapest levels relative to US stocks since 2005.

Some of the falls we have seen in European equity indices are sobering indeed. 

The German Midcap MDAX  has fallen by -27.70% year to date at the time of writing, and many of its larger-cap peers have registered double-digit percentage losses as well over the year to date. As we can see in the chart below.

Darren Sinden research

If we look at relative valuations (see the graphic below) we find that the Stoxx 600 is valued well below Global growth stocks and Big tech in the US  and below both the S&P 500 and the MSCI all-country world index. Using these metrics European equities are being valued more like emerging market stocks than developed ones. 

MSCI data

So just why are European equities experiencing such lowly valuations?

Well, part of the reason can be laid at the door of the conflict in Ukraine and though Europe is not in direct conflict with Russia parts of its economy are on what looks like war footing. 

There are genuine concerns about the supply of gas over the coming winter and power prices reflect that concern. The table below shows the cost in Euros of a megawatt hour of electricity around Europe. 

These prices are four or even five times higher than they were one year ago, and we must remember that temperatures across Europe are still warm, and demand for gas is relatively low as a result.

State Power per MWH in €
🇦🇹 Austria 673.28
🇧🇪 Belgium 516.18
🇧🇬 Bulgaria 677.73
🇨🇿 Czechia 634.55
🇩🇪 Germany 641.07
🇩🇰 Denmark 604.49
🇪🇪 Estonia 333.55
🇪🇸 Spain 187.3
🇫🇮 Finland 333.55
🇫🇷 France 651.77
🇬🇷 Greece 697.41
🇭🇷 Croatia 679.36
🇭🇺 Hungary 690.89
🇮🇹 Italy 550.37
🇱🇹 Lithuania 637.07
🇱🇻 Latvia 564.69
🇳🇱 Netherlands 534.47
🇳🇴 Norway 406.84
🇵🇱 Poland 338.22
🇵🇹 Portugal 187.3
🇷🇴 Romania 683.52
🇷🇸 Serbia 695.05
🇸🇪 Sweden 241.97
🇸🇮 Slovenia 6

75.82

🇸🇰 Slovakia 672.85

 

That’s the bad news but is there any positive news to support European equity markets?

Well perhaps surprisingly the answer is yes because Q2 earnings for Stoxx 600 constituents are expected to show a 29.80% rise from a year ago. 

Much of that gain will be down to Energy stocks but even without their outsize contribution earnings are likely to grow by more than 9.0% according to research by Refintiv. 

Whilst revenues, ex the energy sector, will expand by 17.10%. 

73% of the Stoxx 600 companies that have reported Q2 2022 earnings have posted revenues ahead of consensus forecasts, with 59.90% beating on earnings. 

Things will inevitably slow down of course, but revenues and earnings are expected to grow throughout Q3 and Q4 this year, before slipping into the red in Q2 2023.

Given the falls in price, and the lowly valuations attributed to European equities they are likely to be highly sensitive to good news over the coming months, whilst much of the bad news might be thought to be priced in already.

 

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