European stocks have soared higher as much as global benchmarks this year, leaving them cheaper than equities in the U.S. and Asia as the region’s economy starts to reestablish from the longest recession on record.
After a 7.2 percent advance in 2013, the Euro Stoxx 50 Index exchanges at 12.5 times projected profits, 6.7 percent less than in 2009, the last time the euro area was in the final quarter of a contraction, data compiled by Bloomberg show. In the U.S., where the economy is in its 10th straight quarter of growth, the Standard & Poor’s 500 Index is valued at 15.3 times projected earnings and Japan’s Topix trades at 14.2 times income after Prime Minister Shinzo Abe vowed to end two decades of deflation.
2013 Performance
The Euro Stoxx 50 surged 0.5 percent last week as China’s industrial production topped economists’ forecasts. The gauge of the 50 biggest firms in the euro area has trailed this year’s 14 percent rally in the MSCI World Index of developed-market shares, while also lagging behind the S&P 500’s 19 percent gain and the Topix’s 33 percent surge, according to data compiled by Bloomberg. The euro-region index inched up 0.1 percent to 2,827.15 at the close of trading today.
Economic Development
Economists project the euro-area economy will expand in the fourth quarter after seven straight contractions. The median forecast in a Bloomberg survey of 34 economists calls for 0.2 percent development in the final three months of 2013.
Easing Austerity
Europe’s economy is showing signs of growth as governments relax efforts to trim deficits, according to Pierre Lapointe, the Montreal-based head of global strategy and research at Pavilion Global Markets Ltd. The European Commission in May gave France and Spain two more years to meet budget targets, easing austerity policies championed by Germany to combat the region’s debt crisis. Portugal won one extra year.
Berlusconi Conviction
In Italy, the conviction of former Prime Minister Silvio Berlusconi for tax fraud is creating tensions in Prime Minister Enrico Letta’s government. Berlusconi’s party has rallied around its leader, possibly seeking a presidential pardon and threatening a mass resignation of deputies in parliament.
‘Knock-Out Figures’
“There are fewer negatives for European equities than in the past, but still not that many positives,” Milligan, who helps oversee about $277 billion, said by phone on Aug. 8. “Although valuations are very certainly supportive, it’s difficult to see any knock-out figures that encourage you to go decisively overweight in European equities.”
Book Value
The Euro Stoxx 50 is trading at 1.31 times the value of its companies’ assets, data compiled by Bloomberg show. The ratio of share prices to so-called book value for the S&P 500 is 2.49.
Auto Market
Daimler, which has jumped 31 percent this year, forecast in July significant gains in second-half earnings as the western European auto market bottoms out and new models spur demand. Shares of Turin, Italy-based Fiat Industrial have climbed 15 percent in 2013 as second-quarter revenue rose 3.1 percent.
French Banks
BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s largest banks by market value, reported second-quarter profit that exceeded analysts’ estimates. Paris-based Societe Generale, which said income more than doubled from a year earlier, trades at 10.8 times projected earnings, 64 percent below its 2009 high. Credit Agricole trades at 8.6 times projected profit and BNP Paribas at 10.7 times, according to data compiled by Bloomberg.
Julia Boyce, a spokeswoman for BNP, and Antoine Lheritier, a spokesman for Societe Generale, said they had no comment on the stock performance of their respective companies.Anne-Sophie Gentil, a spokeswoman at Credit Agricole, could not be reached for a comment.
While the S&P 500 has recovered all of the losses from the global financial crisis, the Euro Stoxx 50 is trading 38 percent below its July 2007 peak. Spain’s benchmark IBEX 35 remains 45 percent below its November 2007 high and Italy’s gauge is 61 percent lower than the level reached in May 2007.
That gives the potential for European shares to beat those in the U.S. and Asia in the near term as the recession draws to a close, according to Francois Savary, chief investment officer of Reyl & Cie.
“Europe may surprise within the global economic recovery and recent numbers have proved that this is the case,” Savary, whose firm oversees about 8 billion Swiss francs ($8.7 billion), said by phone from Geneva. “The stabilization is coming earlier than expected, which means you have good potential for equities in the next six to 12 months.”
