Client & Advisor Update - June 07, 2010
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Europe – Is There Value?
· European equities seem much cheaper than in the
US. Europe trades at a 26% Price to Book discount and a 20% Price to Cash Earnings discount to the
US. Some European industries and stocks are deservedly cheap and value traps; other industries and stocks are attractive and will benefit from global growth in exports and other macro trends.
· Shorter term pressure and or volatility will continue to haunt the euro and European equities over the next 12-18 months. It could take several quarters (or longer) for market participants to reward select European stocks as value plays and not value traps. A range of quality stocks in
Europe have attractive risk/return profiles over the next 3-5 years, with the likely exception of banks.
· The sovereign debt problems that began in the Club Med countries are far from under control, and the situation in
Europe may get worse before it gets better. The
UK, US and
Japan will eventually experience sovereign debt and fiscal problems unless their governments undertake major policy changes.
·
Europe is highly integrated with global trade.
Germany, whose export market is 30% larger than that of the
US, is still the largest net exporter globally by a wide margin. A weaker euro will benefit a range of export oriented companies in
Europe. In fact, German exports accelerated in March to a 23.3% growth rate (year-over-year), the highest in 18 years. The weak euro tailwind will likely have a positive impact on automakers (the largest export industry in
Europe), industrials/capital goods, consumer goods and food/beverage companies. A weaker euro will hurt many
US exporting industries selling into
Asia and emerging markets.