EU Stocks against the Dow: who wins?

By | June 2, 2015

Beginning of the last 2-3 months the growth in bond yields (ie, a decrease in their value) poses more questions about the possible reduction of the US stock market. Particularly relevant issue is the fall of the US market against the background of the European stock markets, which reflected a steady monthly demand (in the amount of 10-50 billion Euro) for European equities by non-residents.

Indeed, if we look at earnings growth of stocks (EPS) for the US S & P 500 index and European EU Stocks 600, it becomes clear that the profitability of European companies is restored while the growth of profitability of American companies has turned into a decline. We expect that this trend will continue for another 2-3 quarters: the same term for further drainage and even smoother, but strengthening of the dollar against other major currencies.

As corporations within the US stock S & P 500 index (ES) profit is expected to fall in annual terms for the first time since Q3 2012. One of the reasons for declining profit performance is a high proportion (46%) of external sales (outside the US) American companies. Against the background of dollar selling expensive goods abroad become more difficult.

Europe, it seems, is going to restore the gap in corporate profits from the US, which was formed since 2009. However, there is an important question. Due to what factors the euro zone will recover its position: by the further devaluation of the euro or by increasing consumer lending recovery? There is concern that further possible devaluation of the euro did not significantly help the export sector of the eurozone to increase its power and income as foreign demand for European goods is still weak. This is confirmed by the latest data from the monthly trade surplus eurozone that differ slightly in a positive way in comparison with 2013 and 2014.

Therefore, we would not have to make big bets on a further decline in the euro, as the main driver of the European economy, but more to rely on domestic demand. Positive signs in this direction is a maximum purchase of new cars in the 28 countries of the European Union for the 1st quarter of 2015, starting in 2011 and finding the index of consumer confidence in the euro zone at the maximum for the first time since the crisis began (in 2008). If the decline in the euro would not be accompanied by improvements in business sentiment, it loses its economic meaning. Also, there are positive trends from lending, namely exit from the purely negative to neutral (zero) area of ​​credit growth in the euro area. Recent reporting data the European Central Bank was in February. I take the courage to assume that in April, an increase of loans in the euro area for the first time since 2008, it became positive.

However, the very fact of being a European index on their local maximum adds complexity to the process of selecting assets for shopping. In such circumstances, you need to look closely to individual sectors and stocks. The financial and telecommunications sectors are undervalued worldwide, including in Europe, compared to other market segments. Therefore, these shares are attractive to purchase before the end of 2015 against the backdrop of a possible acceleration of economic growth in Europe.

Share on FacebookShare on Google+Tweet about this on Twitter

Leave a Reply

Your email address will not be published. Required fields are marked *