- JPMorgan: it’s time to switch from the U.S. to Euro-Area stocks.
- Indeed, European indices seem to be far behind the American stock market.
- Short US and long Europe?
Stocks buying opportunity in Europe?
JPMorgan says it’s time to switch from the U.S. to Euro-Area stocks – reported Marketwatch and Bloomberg. They are speaking about a significant “change of heart from JPMorgan equity strategists”. Because, they no longer prefer US stocks to Euro-area equities.
They are also writing about tactical opportunity “opening up for Eurozone to catch up”. The stock market in the European region underperformed 20 percent in dollar terms over the past 18 months. “Close to outright cheap” – wrote JPMorgan. The investment bank expects the economy of the old continent to revive again. The new quantitative easing measures of the ECB can have their effects in some months. (Although other economists doubt it.)
Double performance of US stocks
I made a quick chart to see the longer-term picture. I draw the S&P 500 index and the German DAX from March 9, 2009, from the supposed bottom of the Lehman-crash. (I used the total return version of the S&P 500 /SPXTR/, which also contains the dividend payment yields, like the DAX.)
The S&P 500 Total Return index and the DAX German stocks index, changes in percent (Chart courtesy of Stockcharts.com)
In these ten and a half years, the S&P 500 jumped 443 percent, to reach more than five-fold level in value. (On a yearly basis, this is a turbo-yield of 17.5 percent.) The German DAX rose “only” 239 percent, to more than three times the original value. (Approximately 12.3 percent p. a.) The 13.7 percent fall of the EUR/USD currency pair makes European stocks even cheaper (see the smaller chart below).
Looking at the different P/E ratios
So far, so good. Let’s see these mentioned P/E (price/earnings) ratios. The Wall Street Journal reports the P/E of the Dow Jones Industrial Average by 19.32, NASDAQ 100 Index, 24.35, and S&P 500 Index, 23.05. The DAX index by Bloomberg has a P/E of 20.2. But on this second financial site, the S&P 500 also quotes with 19.58 P/E, lower than on the other page.
The multi-year average of the P/E ratio, the Shiller P/E or CAPE (cyclically-adjusted price-to-earnings) is on a relatively high level in the USA, by 29.2 now. (Source: Starcapital.de.) In Germany, this is only 17.2. In France, 21.0, in Great Britain, 15.8, and Italy, 19.2. Spain seems to be very cheap, with a CAPE of 13.4. (By the way, Russia has 7.2, and Turkey, 7.7.)
Are European stocks priceless?
I’m sure the CAPE indicator also has failures and critics, for example, it seems to rely very much on the past. Besides, it doesn’t consider the level of interest. Many opinions are pointing out that the high valuations of stocks can’t be interpreted independently of the historically low level of interest rates.
But in this case, European stocks would be priceless. Because the negative sovereign bond yields, theoretically, could induce infinite increases in exchange rates.
Although, we know that the underperformance of Europe, has also its special reasons. The economic growth is and was lower, the ECB began its easing measures too late. New and new political worries were on the agenda. Like the Spanish crisis, Greek crisis, Italy worries, the refugee crisis, a lot of elections…
By my experiences, you have to take very seriously what analysts of JPMorgan say. They were often right in the past, or even, they possibly triggered the price movements themselves. Indicators also seem to underpin their opinion.
But I couldn’t sleep well only buying the stocks in this market environment. I’m considering to go long on European stocks and short some overvalued-looking American giants at the same time.
I’m short on the VIX index (S&P 500 CBOE Volatility Index). I’m long on General Electric.
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