Why European Stocks are the Bargain of the Decade

In this short series we explore how European stocks are undervalued against their peers, and why they look set for breakout performance this decade (2020-2030).

To show you just how unpopular it is to be invested in Europe, you can look no further than this graph:

According to this the levels of investment in European equities are low, and have only been lower during the 2008-9 financial crisis and the double dip recession in 2011-2012.

It is entirely possible that you would look at that and think to yourself: why on earth would you want to invest in European stocks? If you want reasons, in this brief series, we’ll go through them!

1. CAPE Ratio suggests European equities are under-valued against other developed world stocks

Academic studies have shown that over 10-year periods or longer, under-valued equity markets do much better than their over-valued peers. The CAPE ratio (cyclically adjusted price earnings ratio) looks at the real earnings per share for stocks in a given geography, smoothed out by using 10 year time periods for the data. Professor Robert Shiller is famous for creating and championing the metric (description here).

Austria, Czech Republic, Poland, Spain, Portugal, Italy, Germany and the United Kingdom (which is leaving the EU) are amongst the top 16 most under-valued countries by equity market valuation.

2. Dividend Yields are unusually high and suggest higher future returns for investors

The dividend yield on the S&P 500 index is 1.9% and has risen recently due to the Covid-19 crisis. Only three months ago it was as low as 1.45%. That means you get 1.9% given to you in the form of income each year. If you anticipate a 7% return overall, then you’re banking on 5.1% capital growth each year.

Here’s a tidy summary of the yields on the European stock market indexes:

The average dividend yield on these seven markets is 4.13% and over double the amount of income you get from the US stock market.

Professor Jeremy Siegel, who wrote the book Stocks for the Long Run, conducted a detailed study of dividend stocks and found that higher-income producing assets tend to outperform the market averages over longer time periods.

3. European fiscal and monetary policy has loosened significantly

The European Union and the United Kingdom have opened up the purse strings and spent significant sums of money on fiscal and monetary stimulus to kick-start the economy.

Germany’s unusually stingy government approved €130 billion euros worth of stimulus; meanwhile the EU through the European Central Bank approved a €600 billion euro bond fund.

It is well documented that money drives the market: that’s where the don’t fight the fed saying comes from. In fact, this has been less of a stimulus and more of a financial bazooka.

Worldwide more than $15 trillion dollars (with a t) has been injected by central banks and governments. The EU and US are on track to have injected up to 50% of their annual GDP by the end of 2020.

The result is this – don’t expect a major stock market crash anytime soon.

4. World Class Businesses are Based in Europe

Rather than ramble through the millions of businesses that are based in Europe, and the calibre of them, it’s perhaps best visualised here:

Frugal Investors – Conclusions

You wouldn’t be amiss if you took a page out of Goldman Sach’s book and invested in the GRANOLA stocks that represented some of the best stocks in Europe.

Other passive investment strategies include following the Euro Stoxx 50 or Euro Stoxx 600 indexes.

Tune in for another series where we explore specific investment opportunities and how best to capitalise on them!