Getting Our Arms Around European Equity ValuationsMarch 16, 2015
With the falling Euro and the recent launch of QE in Europe, European equity markets have come into the spotlight for many investors. Today, we wanted to take a look at European equity valuations in an absolute sense as well as on a relative basis to its developed market peers. Data Note: All aggregate statistics in the tables below are on an equal-weighted, USD basis.
The MSCI Europe Index is heavily tilted towards financials, industrials and consumer discretionary companies. Together, these three industries account for over 57% of off all stocks in the MSCI Europe Index and nearly 50% of the market cap.
MSCI Europe Constituent Breakdown
The average stock in Europe has a P/CF ratio of 15.6x. This is similar to the average stock in the MSCI Pacific Index (15.5x) and the below the average stock in the MSCI North America Index (17x). Europe is unique in that it has the most expensive sector in the MSCI World Index (information technology at 28.5x CF) as well as the cheapest sector in the MSCI World Index (telecom and energy are both currently trading at 7x CF).
MSCI Europe is cheaper relative to the two other regions based on average price to sales ratio (2.6x vs NA at 3.7x and Pacific at 3x). Europe is cheaper than North America based on price to earnings (27.3x vs NA at 27.8x) as well as price to book (3.7x vs NA at 5.5x). However, Europe is more expensive on average than the Pacific region for those two valuation metrics.
MSCI Europe Index Valuations By Sector
MSCI North America Index Valuations By Sector
MSCI Pacific Index Valuations By Sector
If we take a more cyclical view and look at valuations based on PEG ratio, European valuations are similar to those seen in North America and Pacific. European valuations look most attractive on a 5-year normalized basis. On a 5-year normalize basis, European stocks are cheaper than North American or Pacific stocks when one looks at P/E, P/CF and P/S. Pacific stocks are cheaper than European stocks from a P/B perspective.
PEG Ratio By Region
MSCI Europe Index Normalized Valuations By Sector
MSCI North America Index Normalized Valuations By Sector
MSCI Pacific Index Normalized Valuations By Sector
Relative to its 10-year history, European valuations actually look very rich. Across our four favorite valuation metrics, European equities are 20-40% more expensive than its average reading over the past 10-years. This is a greater percentage over average valuations than in either North America or Pacific. Looking at valuations this way, MSCI Pacific stocks seem to offer the greatest value.
MSCI Europe Index Valuations Relative To 10-Year Average Valuations
Valuations Relative To 10-Year Average Valuations By Region
Finally, if we look at valuation breadth at least 71% of all stocks are currently trading above its 5-year valuation average across our four favorite metrics. This is a higher percentage than currently seen in North America or Pacific. 83% of all European stocks are trading above its 5-year P/S ratio while 80% are trading above it’s 5-year P/B ratio.
MSCI Europe Valuation Breadth By Sector
Valuation Breadth By Region
In conclusion, the valuation case for European equities is not clear cut:
- Current average valuation multiples are relatively equal to those seen in North America and Pacific.
- Europe currently has the most expensive (information technology) and least expensive (telecom and energy) of any of the 30 regional sectors.
- On cyclical basis, PEG ratios in Europe are similar to those in North America and Europe
- European valuation levels look the most compelling on a 5-year normalized basis as they are lower than North American and Pacific valuation levels pretty much across the board
- Relative to its own 10-year history, European equities seem expensive on an absolute basis as well as on a relative basis compared to North American and Pacific equities
- There is a greater percentage of European stocks trading above its 5-year average than in North America or Pacific.