Don’t Fight the ECB? Part 2

September 22nd Weekly Market Update

Last week we answered the question of whether the latest bold stimulus measures by the European Central Bank (ECB) are a buy signal for European equities. We highlighted key differences between buying Europe now and the United States several years ago during the start of the Federal Reserve’s (Fed) quantitative easing (QE) programs. The different pictures for growth, valuations, and corporate profits in Europe versus the United States lead us to conclude that we should take a broader view to evaluate the investment opportunity in Europe. To that end, this week we take a deeper dive into the investment opportunity in Europe and evaluate fundamentals, valuations, and technicals — none of which we find particularly compelling at this time.

Although we view the ECB stimulus measures positively, the differences between Europe now and the United States a few years ago, and the fact that Europe’s stimulus moves may not be as effective as what the United States has done, tell us not to overemphasize the ECB in making decisions on Europe. So we turn to our investment process, with its emphasis on fundamentals, valuations, and technicals, and look at some of the key factors that shape our current view of European equity markets:

  • Economic growth is lackluster.
  • Deflation risk is rising.
  • The financial transmission mechanism in Europe is still not working.
  • Earnings expectations may be too high.
  • Geopolitical risks are high.
  • We believe European stocks should trade more cheaply relative to U.S. stocks.
  • European market’s technicals are inferior to the United States.

For the full article: Don’t Fight the ECB? (Part 2 of 2)