Despite the recent selling pressure that European equities have seen, we still believe valuations remain extremely supportive. This is particularly true as, thus far, Europe and the UK have seen slightly more subdued inflation than other regions, which means that at current CPI levels, these are the only parts of the market offering positive real dividend yields.
In addition to comparing favourably with global equities, European equities also still look cheap relative to government bonds and corporate exposures, with both investment grade and high yield exposures in Europe also yielding well below the inflation rate. This implies that there should be a continuation of the “there is no alternative” effect for European equities, which should continue to support investors allocating to this exposure.
MSCI Europe and MSCI EMU Price to Earnings Relative to Global Equities
We also expect to see a continuation of the transition from monetary stimulus offering support to European equities to more fundamentally driven support. Although European equities have seen relatively strong performance this year, particularly during Q3, they have continued to cheapen. This is because earnings have continued to see upward revisions as analysts begin to price in the full impact of economic re-openings; Europe has lagged behind the US in taking full advantage of re-openings.
The final factor that could continue to benefit Europe is the fact that there is a heavy overweight to more cyclically focused companies in the European indices, particularly financials and energy. Investors looking for significant value exposure may want to consider the MSCI Europe Index, as it includes the UK, which is currently trading at a meaningful discount. Investors who are nervous about the impact of Brexit and its knock-on effects can insulate themselves through the MSCI EMU Index, which only holds eurozone securities.
How to play this theme
Investors seeking exposure to the MSCI Europe Index can do so via the SPDR MSCI Europe UCITS ETF, whereas investors seeking exposure to the MSCI EMU Index can use the SPDR MSCI EMU UCITS ETF. To learn more about these ETFs, and to view full performance histories, please click on the preceding fund links.
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For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.F: +49 (0)89-55878-440.
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