While US profits melt away, forecasts in Europe are being upgraded rapidly. Indeed, European earnings per share (EPS) growth should eclipse America’s this year for the first time since 2008, says Morgan Stanley, which is forecasting a 12% increase.
The European economy could exceed expectations this year. Economies have surprised on the upside, with Spain and Germany doing especially well, according to the latest batch of GDP data: German GDP accelerated from 0.1% to 0.7% in the fourth quarter. German manufacturing orders have jumped and eurozone retail sales are at an eight-year high. The slump in the oil prices should provide another tailwind.
The sinking euro – Morgan Stanley expects a 11% fall in the trade-weighted index this year – is boosting foreign sales. The European Central Bank’s (ECB) quantitative-easing (QE) programme should continue to weigh on the currency, as well as lowering corporate debt costs. There is evidence that the credit freeze appears to be thawing, even before the ECB’s QE arrives. Liquidity, moreover, always finds its way into stocks.
While the earnings outlook is brightening, valuations are still very reasonable, with European stocks around a third cheaper in cyclically adjusted price/earnings (Cape) terms than their US counterparts, according to Pictet Asset Management’s Luca Paolini. Spain and Italy, for instance, are on Capes of 11 and 8.5 respectively; Greece, a bet for the very brave, costs just 3.4 times. European stocks, already at seven-year highs, look set to keep rising.