Idea of the day: Time for Europe’s underperformers to play catch up

What: European markets are a sea of green today, some of this jubilation is in reaction to French President Emmanuel Macron’s sweeping victory in the National Assembly elections this weekend. However, while Macron’s policies, if enacted, will be undoubtedly good for some French corporations, we don’t think that the politics is giving us the whole story, instead stock market dynamics could be changing, and this could be good news for Europe’s lagging sectors.

What: European markets are a sea of green today, some of this jubilation is in reaction to French President Emmanuel Macron’s sweeping victory in the National Assembly elections this weekend. However, while Macron’s policies, if enacted, will be undoubtedly good for some French corporations, we don’t think that the politics is giving us the whole story, instead stock market dynamics could be changing, and this could be good news for Europe’s lagging sectors.

How: We have taken a look at the broad European index, the Eurostoxx 600, and performed a brief price-to-earnings analysis to find out which sectors are under-valued. You can see in chart 1 below, that the banking and automobile sectors are the most undervalued relative to the overall index, whereas the consumer staples sector is over-valued. Below, gives a breakdown of the sector P/E analysis:  

  • Automobile sector: P/E is 11.6
  • Banking sector: P/E is 17.7
  • Consumer staples: P/E is 32.3
  • Eurostoxx 600 index: P/E is 19

As you can see, compared to the Eurostoxx 600 index the consumer staples sector is the most over-valued, and the automobile and banking sectors are undervalued. We believe that at this stage of the European stock market rally we could see under-valued sectors start to outperform over-valued sectors and play catch up.

Below we take a look at the main European banking and automobile stocks alongside their P/E ratio so that you can see how they perform relative to eachother, it is also worth comparing individual stocks P/E to the sector analysis above:

  • BNP Parabis: P/E 10.5
  • Santandar: P/E 13.4
  • BBVA: P/E 12.7
  • Barclays: P/E 21.5
  • Danske Bank: P/E 12.1
  • Societe Generale: P/E 11

If we are correct, and we do see a shift from a growth strategy to a value strategy then investors may shun Barclays, which has a high P/E relative to its peers, in favour of other under-valued banking stocks such as Societe Generale.

The main automobile companies included in the Eurostoxx 600 include:

  • Daimler: P/E 7.1
  • BMW: P/E 7.5
  • Volkswagen: P/E 11.1
  • Peugeot: P/E 9.4
  • Renault: P/E 6.6
  • Fiat Chrysler: P/E 4.7

As you can see, all of the automobile stocks that we are including in this analysis have P/E ratios below the Eurostoxx 600’s average, thus they may all benefit from a shift to a value-based equity strategy.

Overall, if we are correct, then a shift to a value based strategy could help the Eurostoxx continue to make further gains. Low levels of volatility, as measured by the Vstoxx index that is close to a record low, could also boost this index. Europe’s stocks are back, and they may stay in favour for some time.

Figure 1: 

Source: City Index 

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