Why Does Everyone Keep Asking Us About Great Value Buys in Europe?

While attending a conference last week and hearing questions and comments such as, "Europe's pretty cheap right now, isn't it?", "Where are you finding the best deals in Europe?", and "I bet you are finding a lot of value in Europe these days", we felt as though it might be appropriate/ necessary to quickly review where European valuations stand at the moment (short answer: the perception that an abundance of relatively inexpensive stocks may be found in Europe is largely misguided).

MSCI Europe equity performance has been mixed so far this year, with less than half of the sectors in positive territory on an absolute basis and just three (Health Care, Utilities, and Telcom) outperforming versus the MSCI World benchmark index.

In light of these lackluster gains, one might reasonably expect to find companies trading at somewhat appealing valuations.  However, whether we look at 3-, 5-, or 7-year time periods, none of the traditional metrics has subsided much from recent highs:

Broken out by sector, we find that one could perhaps be tempted to take a look for some value in the Energy space...

But, then again, all but ONE of the names in European Energy appear to be in unsupported downtrends (partly in reaction to rapidly declining oil prices and other weak indicators). As we have noted before, it might be a better idea to hold off the search for value investments in this region for now:

The Drop in the Oil Price Should Not be Viewed in a Vacuum

It would be one thing if the recent fall in the price of oil was an isolated event completely explainable by supply side and/or geopolitical factors such as overproduction or the desire of the Western powers to punish Russia for its Ukrainian crusade. That, however, does not seem to be the case. Indeed, the drop in the price of oil is being confirmed by a host of other indicators that, in combination, point to the conclusion that global growth is slowing, not accelerating. Below are some charts to help illustrate.

WTI Crude Oil has fallen by about 45% over the last six months:


We've also seen the copper price (the metal with the PhD in economics) slide to another cycle low...


And bond yields in developed economies make new cycle and/or all-time lows:










Derived inflation expectations are tanking:


And the yield curve is undergoing a bull flattener (a bearish sign):


Meanwhile only five out of twenty three developed market country's stock markets are positive YTD, with the US being the only major country to post positive performance:



Europe is down 7.5% in USD terms:


While developed Asia is down 5% in USD terms:


And EMs are down 6.5% in USD terms:

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Catching Up With Emerging Markets

The MSCI Emerging Market Index has had a slightly better year than its developed market counterpart. The average stock in the MSCI EM Index is up 4.9% year-to-date in USD terms compared to a 2.2% rise in the developed market index. However, that average number doesn't really tell the true story as this year has been marked by divergent returns depending on which sector you look at. At the top of the leaderboard, telecom has been the best performing sector on an equal-weighted basis. Telecom is up over 30% year-to-date followed closely by the health care sector (+26.7%). At the bottom of the leaderboard, we find two very cyclical sectors. Unlike in the developed world, the energy sector is not far and away the worst performing sector. In the emerging markets, it has company at the bottom. The energy sector is down over 9% year-to-date while the materials sector is down over 12% year-to-date.

MSCI Emerging Market Index - Performance


From a valuations perspective, health care has by far the highest valuations on an equal-weighted basis. Health care is looking at a P/E of over 36x and a P/CF of over 37x. The average P/CF ratio is 17.5x, which is higher than the average P/CF ratio in the developed world (14.5x). Financials have the lowest P/E ratio of any sector in the emerging markets at 14.6x.

MSCI Emerging Market Index - Valuations


Interestingly, while financials have the lowest P/E ratio they have the second highest expected sales growth over the next four years. Health care has the highest sales growth expectations, while telecom has the lowest. From an EPS growth expectations perspective, health care also has the highest average EPS growth expectations over the next four years. Industrials have the second highest and materials have the third highest. Utilities have the lowest growth expectations in the emerging market.

MSCI Emerging Market Index - Sales Growth Expectations


MSCI Emerging Market Index - EPS Growth Expectations

MSCI World Median P/E At 93-Month High

The median P/E for a stock in the MSCI World Index at the end of November was 19.79x. This is slightly above the P/E at the end of last year (19.70x) and it is at the highest level since January 2007.



There is slight range of values when we break it out by region. The median P/E in  MSCI Pacific is 18.82x. The median P/E in  MSCI Europe is slightly higher at 19.14x. Finally, the median P/E for the MSCI North America is 21.2x, which is a 117-month high.





When we break it out by sector, the range of values widens significantly. Five out of the ten MSCI World sectors have a median P/E over 20x and that doesn't include the materials sector which as a median P/E of 19.49x. The sector with the highest median P/E is health care, which is also by far the best performing sector YTD. The health care median P/E is 27.5x. The sector with the lowest median P/E is unsurprisingly the energy sector. The energy sector median P/E is about half of what the median P/E in health care is. The energy sector median P/E stands at 14.86x. Charts of the 10 sectors are below.