Simplest Valuation Case on Europe Stocks Looks Ugly to HSBCby
Bank favors using trailing P/Es to value European equities
HSBC expects the Euro Stoxx 50 to plunge 22% this year
Europe’s stocks are far from cheap.
That’s according to Robert Parkes, head of European equity strategy at HSBC Holdings Plc, who says the market is “fully valued and bordering on expensive.” To illustrate, he pointed to the MSCI Europe Index’s price-earnings ratio, which at about 20 times reported profit is near the highest since 2004. That’s even after the gauge fell 5.9 percent this year.
Investors including JPMorgan Asset Management and Pictet Asset Management have said Europe’s stocks are a bargain, going by metrics such as multiples adjusted for inflation or prices relative to projected earnings. But for Parkes, trailing figures are the better measure because he says analysts have struggled to accurately estimate net income.
“In a world where Europe is skating on thin ice -- in the sense that we could potentially get a recession in Europe as well as in the U.K. -- the European market is not cheap,” he said. His firm has an underweight rating on euro-area shares. “Based on the combination of how wrong consensus numbers about European earnings growth have been in recent history and the elevated levels of uncertainty we are seeing in Europe in terms of the outlook for economic growth, the trailing numbers could be more meaningful.”
Analysts, who started the year predicting earnings at Euro Stoxx 50 Index companies would grow 4.2 percent in 2016, have been cutting projections since amid the U.K. secession vote and other traumas, and are now estimating a 2.5 percent contraction. They’re still predicting growth of more than 12 percent for 2017, and that may also be too high, Parkes said.
Even on the basis of estimated earnings, European stocks are not especially cheap, Parkes said. The Euro Stoxx 50 trades at about 13 times estimated earnings, 9 percent more than its five-year average, data compiled by Bloomberg show. The MSCI All-Country World Index and the S&P 500 Index have higher valuations.
Global fund managers this month turned underweight Europe’s shares for the first time in three years. After pouring record money in the region’s funds in 2015, they’re bailing at the fastest pace ever. They’ve withdrawn money from the equities for 24 straight weeks.
HSBC is the most bearish among 14 strategists surveyed by Bloomberg, predicting the Euro Stoxx 50 will lose 22 percent this year. The average forecast calls for a 9.2 percent decline. The index has already slipped 8.2 percent in 2016, while the S&P 500 Index has rallied to a fresh record and the MSCI Asia Pacific Index has climbed 2.1 percent.