In a post-Brexit environment, many immediately wrote-off European exposure in a knee-jerk reaction to the ongoing uncertainties. However, investors may miss out on cheap valuations in Europe-related exchange traded funds as a long-term investment opportunity.
According to JPMorgan Asset Management, the European stock market has gotten too cheap to resist, with valuations on the MSCI Europe ex-UK Index and the FTSE All-Shares Index at attractive valuations when their price-to-earnings ratios are adjusted for inflation over the past 10 years, reports Aleksandra Gjorgievska for Bloomberg.
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Adjusted for inflation, the MSCI Europe ex-UK Index traded at 15 times earnings at the end of June, compared to its long-term average of 19.4 since the 1980s. The FTSE All-Share Index was trading at 12.3 times earnings, compared to a mean of 17.
Looking at U.S.-listed ETF options, the broad Vanguard FTSE Europe ETF (NYSEArca: VGK) is trading at a 16.35 P/E – VGK includes exposure to Eurozone members along with U.K. and Switzerland. The Eurozone-focused iShares MSCI EMU ETF (NYSEArca: EZU) and SPDR EURO STOXX 50 (NYSEArca: FEZ) show a 14.22 P/E and 13.74 P/E, respectively.
Consequently, Stephen Macklow-Smith, head of European equity strategy at JPMorgan Asset Management, said European equities are a buy, with multiples below their long-term averages.
[related_stories]“In the short term, we can see nothing that suggests the referendum result will rock European confidence and growth particularly,” Macklow-Smith told Bloomberg. “If in Europe the show stays on the road and we don’t get renewed concerns about the integrity of the euro zone, some drivers within the economy can come through and improve earnings — and there is more to go for.”
Looking ahead, Macklow-Smith argued that Europe’s recovery is still in its early stages and looks durable, pointing to the ongoing decline in the Eurozone’s unemployment rate, which is now at its lowest since 2011, and improvement in consumer confidence, which should buoy earnings growth. Meanwhile, in the U.K., he expects exporters to remain strong due to the pound trading at three-decade lows.
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Moreover, Macklow-Smith believed that stocks also look attractive, compared to cash and sovereign bonds, in the long-yield environment. The Euro Stoxx 50 Index has a 4.3% dividend yield, whereas average government debt comes with a 0.25% yield.
VGK has a 3.18% 12-month yield. EZU comes with a 2.87% 12-month yield. FEZ shows a 3.13% 12-month yield.
“It’s a struggle to recapture investor interest, and part of that is that earnings have been moribund for the past five or six years,” Macklow-Smith added. “But when you factor out the investment cycle, we are actually in buy territory. Yes, there are risks about investing in Europe, but at some point that is implicit in the valuation.”