Skip to main content
//empty //empty

A trader works at Intesa Sanpaolo bank in Milan on Aug. 8, 2011. The Euro Stoxx 50 was down 3.72 per cent for the day and 11.82 in the past five days.

Stefano Rellandini/reuters/Stefano Rellandini/reuters

It's hard to be bullish about European equities. The economies look weak both inside and outside the euro zone and the single currency's crisis only seems to get worse. But the share prices may be discounting even more bad news.

The STOXX 50 index of leading euro zone shares has lost all the tentative gains made in the first part of this year and is standing at not much more than half the level of five years ago. The total return since then, including reinvested dividends, is a depressingly high loss of 35 per cent. In the United States, the total return of the S&P 500 over the same period is slightly positive.

Some underperformance is justified by Europe's weaker economic performance and by the euro zone's problems. The relative weakness on the eastern side of the Atlantic is reflected in earnings expectations for 2012. Thomson Reuters data indicate a 5 per cent gain in the euro zone and 10 per cent in the United States. The most recent economic news suggests the gap could widen.

Story continues below advertisement

But European share prices may reflect too much pessimism. European equities have usually been cheap by American standards; right now the discount of forward earnings multiple is above the post-1987 average. And not only is the 9.5 price-earnings ratio one-quarter less than the equivalent U.S. figure, it appears to discount no earnings growth at all in the next five years and no increase in valuation.

There could be big rewards for those brave enough to buy. If euro stocks' earnings rise at half the post-2005 annual rate of 10 per cent over the next five years and P/E ratios move only halfway back to the long term norm, then investors will earn inflation-adjusted annual returns of 11.6 per cent.

Euro stocks seem to discount the lion's share of the new misery. Those prepared to put their heads in the lion's mouth could come out smiling.

Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies