Long-term investors should buy Europe now

Oct 27, 2011, 11:29

Merryn Somerset Webb

Posted byMerryn Somerset Webb

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Funds have been flowing out of European stock markets for three years now. But if you think the best time to invest is when everyone else just can't bring themselves to, now might be your time.

Bloomberg did its quarterly survey of global investors at the end of last month. The results were pure misery. 75% of those questioned thought the euro area would fall into recession in the next two months. 53% thought the turmoil in the banking sector would get worse. 72% think at least one country will abandon the euro within five years. 51% think the whole eurozone will collapse, and a mere 20% thought EU markets offer the best opportunity over the next year.

Yet 40% of respondents went for the US as the best place to be. That's despite the fact that Europe trades at a 17% relative valuation discount to the US in p/e terms and despite the fact that German and French equity valuations – on a cyclically adjusted p/e basis – are at a 30-year low.

I think that if you gave me the choice today of buying into Europe or buying into the US, I'd take the former.

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  • 1. James Hobman

    (27 October 2011, 01:29PM)  Complain about this comment

    That's all very well in theory but the markets are now so tightly correlated that they're all moving together. Collective psychology - fear and greed - moves markets.

  • 2. Nick Johnson

    (27 October 2011, 01:51PM)  Complain about this comment

    That would be true if the Eurozone wasn't on the precipice of complete economic collapse. I wouldn't touch european equities with a barge pole. The bailout of the eurozone is utter folly, the sooner that dead currency is unwound the sooner the world can get some stability back.

    I am nervous about any equities at the moment. Even Severn Trent with its RPI + K pricing formula could see some poor dividends if the PPI of 17.5% starts hitting its costs, which won't be carried through into RPI except maybe on a year long lag.

  • 3. Kerome

    (28 October 2011, 07:03AM)  Complain about this comment

    Agreed it's right to be nervous about equities, but in a way attitudes to the entire euros one are putting downward pressure on pricing of the stronger parts of the block... If an eventual breakup happens the different parts will rebalance, its just finding a way to play that.

  • 4. alex

    (28 October 2011, 11:16AM)  Complain about this comment

    It's worth mentioning for income seekers that both France and Germany place a 25% witholding tax on dividends.

  • 5. frank

    (31 October 2011, 11:08PM)  Complain about this comment

    This is one article that could lose you money! Shouldn't you wait for the inevitable euro zone crash as more countries default on sovereign debt?

  • 6. Beta adjusted

    (02 November 2011, 10:05AM)  Complain about this comment

    No mention of FX risk either ... at a recent IFA presentation I attended, US banks were far cheaper than European ones ... doesn't mean I'd touch them with a barge-pole (on a separate note I was shocked: FTSE-All-share tracker funds are no place for the average person's money with 55% exposure to banks, global mining and oil companies. And yet this is the normal benchmark being used to allocate retail assets. Dreadful!!)

  • 7. IJ

    (02 November 2011, 01:12PM)  Complain about this comment

    good call, if a tad late. back in September there were some great value propositions in Europe, but they rallied very strongly. that currency won't be "unwound", but it will almost certainly get weaker when the ECB starts printing money. this will only benefit companies like siemens and volkswagen. those of you who worry about the Eurozone collapse shouldn't be touching anything with a bargepole!

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