Our Insights

About personal finance, investments and markets.
March 22, 2014

European equites cheaper than US stocks

Equities are expensive after the rally of the last few years, we often hear critics argue. But this analysis is too superficial, since not all regions trade on the same multiples. If we compare the price-to-book multiple of the European market to the US equity market, we find that European stocks trade below their long-term average.

Price-To-Book-Ratios EU vs US

Not only does the valuation for European stocks appear more attractive, there are also a couple of compelling reasons why earnings growth of EU companies should exceed those in the US:

* The ECB is likely to stay easier for longer than the US Fed and stimulus may even be an option in the future should economies remain stagnant. The countries hit hardest by the Euro debt crisis still have much progress to make before they can return to normal, and a low-for-longer rate stance by the ECB makes European equities attractive relative to fixed income assets.

* European margins are currently close to half of US levels (US margins are close to a 50- year high; those in Europe are below their historical average levels). We generally are big believers in mean-reversion.

Net income margins in Europe vs US and World

For further questions, please contact us at info@ipanema-capital.com

Thomson Reuters

Please read our Terms of Use.