- European stocks are beginning to close their recent and historically unusual performance gap.
- We expect corporate earnings in Europe to outpace those in the U.S.
- Multiple catalysts, including continued implementation of labor reforms, point to reduced long-term unemployment and increased economic output.
In the view of many investors, Europe has been lurching from crisis to crisis for a decade. Following the global financial crisis, Europe has faced challenges including a near default in Greece, threats of a possible break-up of the euro, and most recently Brexit, all of which have dragged on the region’s economic growth and equity prices. Lately, however, indicators point to the potential for European equities to outperform those in the U.S.
Since 1973, returns from European and U.S. equity markets have generally kept pace with each other. Over these 44 years, Europe has outperformed in 23, or just over half the time (see Chart 1 below). However, in recent years, U.S. stocks have maintained a positive trajectory while European equities have been more volatile. For example, during the last seven calendar years the U.S. has outperformed in six. The last time we saw a similar pattern of near-consecutive outperformance of U.S. stocks was 1995-2001. Subsequently, European stocks outperformed for the next six years. Given this history, we expect closure of this more recent performance gap— and we may indeed be seeing the beginnings of this reversion with European equities outperforming the U.S. year-to-date.
*MSCI Europe - MSCI USA calendar year returns in USD, gross dividends
Source: MSCI. For illustrative purposes only. Past results are no guarantee of future results. Investors have the opportunity for loss as well as profits. Index Source: MSCI. Copyright MSCI 2017. All Rights Reserved. Unpublished. PROPRIETARY TO MSCI.
Despite the similar longer-term performance of European and U.S. stocks through the years, European companies have typically traded at discounts to U.S. stocks on many valuation measures. Table 1 below shows current valuation ratios and both current and historical discounts. As of their last reported (or Fiscal Year 0) price/earnings, European stocks traded at an 11% discount which is in line with most of history. However, on measures such as price/book, Europe was trading at a deeper than normal discount. Beyond these considerable discounts, two points are worth noting. First, European stocks currently provide far more generous dividends than U.S. companies. This has advantages to investors who may not be able to easily liquidate principal. Second, expected earnings growth for the current fiscal year versus last year is considerably higher for European companies (+19%) than for those in the U.S. (+11%). Given their lower valuations, this expected additional earnings growth makes European equities all the more attractive.
Catalysts For Recovery
In addition to technical and valuation drivers, there are reasons to expect strong economic and market performance in Europe. Although the Bank of England has recently reduced its growth forecasts citing lower investment and spending in the face of uncertainty surrounding Brexit negotiations, there are positive signs elsewhere in Europe. Offsetting weakness in Britain are investments by financial institutions in Frankfurt, Dublin, and other cities staying within the European Union. Perhaps more important are labor reforms focusing on reducing unemployment and increasing output. Since the 1990s and early 2000s, a number of European countries have implemented policies that allow temporary employment contracts, reduce long-term unemployment benefits, and support training and placement programs. More recently, President Macron of France has made further liberalization of labor markets central to his new economic plan. The degree of labor reform still varies across Europe and can take considerable time to show material results, but the trend is clear and equity markets often respond in advance of measured economic gains. Adding to these developments is the trade surplus enjoyed by Europe. Exporters in particular will benefit from the recovery we are seeing in global economic activity.
Despite having lagged U.S. equities for several years – and perhaps in part because of it – European equities look poised to outperform. For investors considering a new or increased allocation to European equities, this appears to be an ideal time.
Source: MSCI and IBES. PB, PCE and Yield data back to January 1975, FY0 and FY1 back to January 1988. For illustrative purposes only. Past results are no guarantee of future results. Investors have the opportunity for loss as well as profits. Index Source: MSCI. Copyright MSCI 2017. All Rights Reserved. Unpublished. PROPRIETARY TO MSCI.
General Legal Disclaimer
Acadian provides this material as a general overview of the firm, our processes and our investment capabilities. It has been provided for informational purposes only. It does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or to purchase, shares, units or other interests in investments that may be referred to herein and must not be construed as investment or financial product advice. Acadian has not considered any reader’s financial situation, objective or needs in providing the relevant information.
The value of investments may fall as well as rise and you may not get back your original investment. Past performance is not necessarily a guide to future performance or returns. Acadian has taken all reasonable care to ensure that the information contained in this material is accurate at the time of its distribution, no representation or warranty, express or implied, is made as to the accuracy, reliability or completeness of such information.
This material contains privileged and confidential information and is intended only for the recipient/s. Any distribution, reproduction or other use of this presentation by recipients is strictly prohibited. If you are not the intended recipient and this presentation has been sent or passed on to you in error, please contact us immediately. Confidentiality and privilege are not lost by this presentation having been sent or passed on to you in error.
Acadian’s quantitative investment process is supported by extensive proprietary computer code. Acadian’s researchers, software developers, and IT teams follow a structured design, development, testing, change control, and review processes during the development of its systems and the implementation within our investment process. These controls and their effectiveness are subject to regular internal reviews, at least annual independent review by our SOC1 auditor. However, despite these extensive controls it is possible that errors may occur in coding and within the investment process, as is the case with any complex software or data-driven model, and no guarantee or warranty can be provided that any quantitative investment model is completely free of errors. Any such errors could have a negative impact on investment results. We have in place control systems and processes which are intended to identify in a timely manner any such errors which would have a material impact on the investment process.
Acadian Asset Management LLC has wholly owned affiliates located in London, Singapore, Sydney, and Tokyo. Pursuant to the terms of service level agreements with each affiliate, employees of Acadian Asset Management LLC may provide certain services on behalf of each affiliate and employees of each affiliate may provide certain administrative services, including marketing and client service, on behalf of Acadian Asset Management LLC.
Acadian Asset Management LLC is registered as an investment adviser with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any level of skill or training.
Acadian Asset Management (Japan) is a Financial Instrument Operator (Discretionary Investment Management Business). Register Number DirectorGeneral Kanto Local Financial Bureau (Kinsho) Number 2814. Member of Japan Investment Advisers Association.
Acadian Asset Management (Singapore) Pte Ltd, (Registration Number: 199902125D) is licensed by the Monetary Authority of Singapore.
Acadian Asset Management (Australia) Limited (ABN 41 114 200 127) is the holder of Australian financial services license number 291872 (“AFSL”). Under the terms of its AFSL, Acadian Asset Management (Australia) Limited is limited to providing the financial services under its license to wholesale clients only. This marketing material is not to be provided to retail clients.
Acadian Asset Management (UK) Limited is authorized and regulated by the Financial Conduct Authority (‘the FCA’) and is a limited liability company incorporated in England and Wales with company number 05644066. Acadian Asset Management (UK) Limited will only make this material available to Professional Clients and Eligible Counterparties as defined by the FCA under the Markets in Financial Instruments Directive.