Best Europe Stock Market Gets Cheap as Profit Estimates Jump

  • British economic data have been better than forecast
  • HSBC sees complacency as Brexit details still unknown

After turning the most expensive ever against European peers in the aftermath of the secession vote, U.K. shares are starting to look cheap again.

While equity prices have stabilized following the initial boost from a plunging pound, analysts have kept on raising their estimates for profit growth. Since the day of the Brexit referendum, they’ve increased them by 9.4 percent, data compiled by Bloomberg show. That’s pushed the valuation of the FTSE All-Share Index to 15.6 times projected earnings, the lowest in seven months relative to the Euro Stoxx 50 Index.

“The U.K. is very well positioned at the moment,” said Benno Galliker, a trader at Luzerner Kantonalbank AG in Lucerne, Switzerland, whose firm recently bought more U.K. equities and sold bonds. He said he expects the pound to stay weak for the foreseeable future, which will benefit company earnings. “The U.K. looks cheaper now -- this absolutely makes it a buying opportunity. Investor appetite is definitely still there.”

Adding to optimism about the currency benefit are an accommodative central bank and recent data showing the U.K. economy is weathering the effect of the June secession vote better than expected. On the other hand, euro-area figures are back to missing forecasts, and European Central Bank President Mario Draghi downplayed the need for additional stimulus this month.

British shares have become the year’s best performers among major markets in Europe, with the FTSE All-Share Index up 8.9 percent, compared with a 7.2 percent drop for the Euro Stoxx 50. While analysts still see profits at the nation’s largest companies falling this year, they project a more than 12 percent jump in the following three.

To HSBC Holdings Plc’s Robert Parkes, investors have become complacent about the impact of a secession from the European Union. Prime Minister Theresa May has yet to trigger Article 50 of the Lisbon Treaty, which begins the exit process. She has ruled out starting those talks before next year.

“We haven’t actually left Europe yet, and that’s a point a lot of people are forgetting,” said Parkes, director of European equity strategy at HSBC in London. “We still don’t know what the plan is and what the trade terms will be.”

He sees the FTSE 100 Index ending the year at 6,200. While that’s the most bearish forecast among nine strategists surveyed by Bloomberg, the average of the other eight is 6,738, or about 2.5 percent below Thursday’s close.

The better-than-forecast economic figures may damp speculation for further monetary easing in the U.K., while the ECB might need to act again soon to help a euro-area recovery, said Jasper Lawler, an analyst at CMC Markets in London. The differing prospects for further stimulus have also contributed to the shift in valuations between Britain and the euro region, he said.

“The spread was looking a bit extreme after Brexit,” Lawler said. “This does on the face value make U.K. stocks more attractive at this point.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE