Elevated market valuations, the length of the bull market in equities – already the second longest in US history - and rising 10-year yields, are increasingly worrying investors and have given rise to fears of a downturn. The economic and the interest rate cycle in the US is more mature than in Europe, the outlook for Europe from an investors point of view is currently better. Relative outperformance, central bank policy, market valuations and earnings trends are in favour of Europa.
1. Since the introduction of the STOXX 600 in 1988 until 2008 the average yearly performance was 11.2% resp. 12.0%, whereas from 2008 until today it was 3.5% vs. 8.2%. Of course, there are arguments why the US was more successful. The Fed started earlier with the bond buying program, while in Europe there were still discussions about the legal possibility of such bond buying schemes, and even the survival of the euro was in doubt for some time, but that's a look in the rearview mirror.
2. The European economic cycle is lagging the US cycle by at least 2 years. The FED already has stopped her bond buying program and also introduced rate hikes, the ECB will continue its program until at least September this year. Interest rate hikes are expected the earliest in mid-2019.
3. Even if we correct valuations by the effect of different industry weights, the valuation gap is on a 25 years high.
4. Earnings expectations for European companies are still up while they have flattened in the US. Operating margins in the US are 20% above peak levels of 2007, while European profit margins barely have reached 2007 levels, and still have room to grow.
On the other way, of course, some imponderables are in the way, especially from the political side. To date, the policy of President Trump can be interpreted as an aggressive bluff, the logic is as follows: claim that you have been treated unfair – threaten you partners with heavy proposed measures – finally make a small deal and you are a relative winner. To date, China, Europe and even North Korea have acted according to plan, it is hard to say what the consequences would be if they did not. Nevertheless, in a relatively "rational" political and economic environment, Europe should benefit.
Author:
Horst Simbürger, MSc, CEFA
Managing Director
CONVERTINVEST Financial Services GmbH
2 May 2018
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.