European stocks may fall further, but investors increasingly agree on one thing – they’re cheap.
Although Bank of America’s latest fund manager survey shows investors fleeing European stocks, a majority agree Europe is now undervalued.
So does Barclays. There was a "buzz" around European outperformance earlier this year but that was short-lived following recent record European outflows, Barclays noted last week. As a result, Europe is "under-owned again".
Europe “was never expensive in the first place relative to the US, but current levels are historically depressed”, the firm says, with valuations now back to a record discount relative to the US.
At the recent lows, European stocks were pricing in two-thirds chance of a recession, says Barclays, based on the average peak-to-trough fall of 35 per cent seen during recessionary times. Stocks subsequently enjoyed a decent rebound, following promising Ukraine peace talks, but Barclays admits more downside is possible given headline risk remains high.
For now, the bank reckons a European recession remains unlikely. So do analysts at Schwab, who say European recession odds are "above average and rising, but still below 50 per cent".
If recessionary fears are realised, however, then cheap European stocks may get cheaper. Europe currently trades on 13.1 times earnings – below historical norms, says Barclays, but also higher than the average multiple (10.1) seen at the market trough of past recessions.