After a strong rally following the election, U.S. stocks are trading near all-time highs and at some of their richest valuations on record. European shares have also rallied, but trade at lower valuations on earnings that are below their prior peak. The FT explains the opportunity that some investors see in Europe. If you aren’t at least looking for opportunities in foreign markets, you could be missing a compelling opportunity.
“American investors have pretty much given up on Europe,” says Joseph Oughourlian, founder of the $1.5bn activist hedge fund Amber Capital. “Europe is seen as the big loser in the current geopolitical trend. People feel [Donald] Trump is almost openly in favour of the disintegration of the European Union and that Brexit is just the beginning.”
As nimbler alternative asset managers seek to increase their exposure to European assets, with early buyers having booked big gains for 2016, a broader base of mainstream fund managers appear unconvinced. The most recent Bank of America Merrill Lynch monthly fund manager survey, which polls investors controlling a total of $547bn of assets, shows that Europe remained significantly less favoured than the US. The survey’s measure of sentiment towards the single currency stayed at rock bottom.
Fundamental valuations, however, suggest that consensus opinion on Europe may well be too negative. European equities have rarely been as cheap when compared with the rest of the world, according to Northern Trust. With many fearing the political risks hanging over Europe while embracing the idea of the so-called “Trump trade” the valuation gap between stock markets in the US and Europe has remained wide. The US S&P 500 index currently trades at a forward price to earnings multiple of over 17 times, compared with less than 15 times for the pan-European Stoxx 600.
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