Gavekal Capital: Europe is Not Japan: Expensive Financial Stocks may not Rally Hard with QE

Friday, January 23, 2015

Europe is Not Japan: Expensive Financial Stocks may not Rally Hard with QE

Since the ECB announced its open ended QE program we have seen numerous parallels being drawn with Japan's amped-up QE program announced in April of 2013, but telegraphed in late 2012. One of those parallels is that like Japanese financial stocks, Europe's financial stocks should experience a sharp rally in the coming months. While this may end up happening, we want to point out one key difference between Japan's and Europe's financials around when their respective QE programs were announced: VALUATIONS!

As the first chart below shows, when Japan began laying the groundwork for the expansion of QE in late 2012 financial stocks began to rally hard, but the median financial stock was trading at only about 0.8x book value and only slightly above the valuation nadir achieved in 2009.

Turning our attention to chart two, we can see that the median European financial stock is trading at 1.2x book value, which is a seven year high.

So while we may in fact end up seeing European financials stage a rally to correct some of the stark undperformance of late, one can hardly make a valuation case for Europe's financials here, unlike Japan''s financials in 2012.

About Gavekal Capital

Gavekal Capital is a US registered investment advisory firm that manages the Gavekal Knowledge Leaders Strategy. Knowledge Leaders are a group of the world’s leading innovators with deep reservoirs of intangible capital. These companies often possess competitive advantages such as strong brand, proprietary knowledge or a unique distribution mechanism. Knowledge Leaders are largely service-based and advanced manufacturing businesses, often operating globally. Gavekal Capital seeks to identify the world’s leading knowledge companies through a proprietary process that analyzes corporate knowledge investments.
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