In Europe, Recovery Elusive, but Valuations Look Attractive | Capital Group

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2016 Outlook

GROWTH AMID VOLATILITY  |  International  |  January 2016
In Europe, Recovery Elusive, but Valuations Look Attractive

Attractive Valuations Found Amid Currency Weakness and Central Bank Stimulus

“The euro-zone economy is recovering, but it’s hard to do a victory lap when GDP growth is 1.5%. The feeling has been that it will never be as good as you hope for, and it will never be as bad as you fear. That’s Europe.”

Gerald Du Manoir
Gerald Du Manoir Portfolio Manager Los Angeles office 27 years of experience (as of 12/31/16)

The Valuation Gap: European Companies Trading at a Discount to U.S. Counterparts

Sources: RIMES, Thomson Reuters Datastream as of December 31, 2015.

Europe’s economy continues to follow a familiar path of low growth and low inflation. The 19-member euro zone is recovering from global and local financial crises; however, it is doing so at a significantly slower pace than the United States and the United Kingdom. Economic growth around 1.5% has become the norm, along with an unemployment rate hovering around 11%.

Stubbornly low inflation and occasional bouts of deflation have the European Central Bank virtually promising more quantitative easing in 2016. A resulting decline in the value of the euro should help boost exports, tourism and consumer spending.

Despite the challenges, potential opportunities are emerging in various corners of the continent, including homebuilders addressing pent-up housing demand, and toll road operators expanding amid Spain’s economic recovery. What’s more, valuations appear relatively attractive in a number of areas.

European companies sometimes trade at a significant valuation gap to U.S. counterparts. The chart above shows examples of this trend across four industries. Consider the pair of conservatively managed financial institutions: Wells Fargo and Lloyds. Although their end markets are quite different, their business models have similarities. An argument could be made that Lloyds looks more attractive trading at a price-to-earnings ratio of 9.4, compared to Wells Fargo’s 12.6.

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Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.