European stocks are cheap, but risks remain

Investors are wary of European stocks for reasons too obvious to mention, but there is some good news — European equities look increasingly cheap.

Callum Thomas of Topdown Charts describes the European equity space as “deep trouble, [but] deep value”. Europe’s combined price-earnings (p/e) ratio — an average of three different valuation metrics — has fallen to “extreme cheap levels”, says Thomas, near levels seen at the bottom of the dotcom bust and 2020′s Covid-related crash.

Société Générale’s Andrew Lapthorne makes the same point, saying European valuations are the cheapest since the 2011-12 sovereign debt crisis. Additionally, Lapthorne’s data shows roughly one in five European stocks now trade in deep value territory (less than seven times forward earnings estimates) — almost twice as many as in 2011-12.

There is a “but”, however. Barclays agrees European stocks look “particularly cheap” but cautions p/e ratios will look less attractive when earnings inevitably fall. Thomas agrees European stocks will look less cheap if earnings fall fast.

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Additionally, valuations have “yet to plumb the absolute lows” seen during the 2008-09 financial crisis and the 2011-12 sovereign debt crisis.

Overall, European valuations more accurately reflect the risks, says Thomas, but we don’t know if they are cheap enough to compensate for the outsized economic risks. Cheap may yet get cheaper.