European stock markets have risen about 70% in the past five years, despite some setbacks, not to mention the US market, which has more or less doubled. Corporate earnings have not been able to grow and have been stagnating in Europe for five years. In the US earnings have increased by about 30%, which explains the difference in performances. The price increases resulted in significant multiple expansions, even on the basis of expected earnings, the P/E ratio for Europa stands at 15.
The IMF has recently raised its growth expectations, and the signs are growing that profits are actually rising this year. Europe's corporate earnings are expected to grow by 11%. It is also positive that earnings revisions for Europe are still positive, unlike the last five years. Despite the first interest rate hike by the FED, the central banks have remained moderate, in sum we are looking at a positive environment for the stock exchanges, but there are political uncertainties arising. Admittedly, the unexpected Brexit decision and the Trump election irritated the markets only for a short while. The elections in France also seem to deliver the hoped-for result. However, many political decisions are taking place in Europe this year. In the USA the effect of a growth package initiated by president Trump is being increasingly questioned. After the failure of his health package and the suspension of the entry ban for numerous muslim countries, Trump is domestically wounded. The military strike against Syria on the occasion of the presumed use of toxic gases by the Syrian army, however, has brought him international praise. A vain president such as Trump could well come to the taste of similar actions, and thus cause international irritation.
What does this mean for investors? Equity prices have seen an acceleration of the uptrend in the last half year, Europe is currently moving at an annual growth rate of 40%, which is not sustainable! Positive earnings expectations are within the prices. It could be a wise decision to reduce equity weightings slightly, but to stay overweight. The fundamentals remain positive, although some political uncertainties remain.
Author:
Horst Simbürger, MSc, CEFA
Head of Department Shares and Bonds
Union Investment Austria GmbH
25 April 2017
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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.