Analysts think flows to Europe will continue
European indices are ending the year on a high. Not only have the main bourses
surged 15 per cent since June , there have been 22 consecutive weeks of fund inflows from US investors – the longest streak since records began.
A raft of bank analysts are suggesting the flows into Europe will continue despite continued earnings stagnation.
Market gains have come almost entirely from an expansion in valuation multiples – Europeans equities now trade on over 13 times earnings, just above its 10-year average.
No longer a screaming bargain, then, but there is a case for continued gains.
Fund inflows have been a mere fraction of the cumulative outflows since 2007; the earnings recovery is in its infancy (European profits are 25 per cent below 2007 levels, while US earnings and profit margins are at all-time highs); and while Europe’s one-year price-earnings ratio has risen steeply, its 10 cyclically adjusted ratio is at 12.3 – still much lower than its 30-year average of 17, says London–based Capital Economics, and allowing some breathing room for investors.
US outperforms rest of world
In contrast, the S&P 500 is the most expensive of the world’s 44 developed and emerging markets, cautions investment manager Mebane Faber.
Faber’s valuation derives from a 10-year cyclically adjusted price-earnings ratio (Cape). Cape has its critics – Prof Jeremy Siegel (pictured above) asserts the measure, once reliable, is now redundant due to accounting changes. Siegel, who correctly predicted this year’s 25 per cent gain, says the market remains 10 to 15 per cent undervalued.
Barclays’ Barry Knapp is somewhere in between, predicting the US – the “unambiguous leader in this current equity cycle” – will advance next year whilst advising investors to rotate into cheaper global markets.
A Barclays chart shows the US has outperformed the rest of the world throughout the 1995-2013 period, although the gap had shrunk to near irrelevance in 2008. Today, however, the spread is wider than ever – the US is now up over 450 per cent since 1995, compared to 200 per cent for the rest of the world. There is, as Knapp puts it, “a large gap to fill”.
Bulls remain firmly in control
US markets may be over–valued and vulnerable to a pullback, but there is little evidence the bull market is tiring.
Take market breadth. In a healthy bull market most stocks advance, whereas tired bull runs become narrow, with a small number of large-cap stocks doing the heavy lifting.