Although equity valuations on the continent look good, the economy and the Euro are not faring too w...
Although equity valuations on the continent look good, the economy and the Euro are not faring too well, so it might be better to invest in UK rather in European stocks, says L&G's financial economist Andrew Clare.
Clare has identified the investment hotspots by comparing the performances of the UK and Euroland economies.
The Euroland equity market is currently at a ten-year low with the PE ratios of the French CAC40 at 10.2 and the German DAX at 9.4. The Euroland equities appear to be on the cheap side of fair value when compared to the US S&P500's PE ratio which is currently at 20.7.
The fixed income markets in Europe also make the equities look relatively attractive, given that the Bund yields have fallen to 4.33%. L&G says that from an earnings basis, Euroland equities currently yield twice as much as Bunds.
Even though the aggregate level of the Euroland equities looks to be good value, L&G has flagged up Oil and Gas and Utilities as their two favourite equity sectors. The current geo-political situation mean oil prices are likely to remain high, and the defensive merits of the Utilities sector has brought some of these stocks yields of over 6%.
On the other side of the spectrum L&G remains concerned about the exposure of investment banks to the slowing economy and cautions investing in the IT hardware sector which it believes suffers from over-capacity.
But L&G cautions that although Euroland equities are cheap, the economy looks weak and the Euro is lagging 13% lower than the dollar since its launch. Investors are also still tentatively watching the de-rating of the US equity market which affects their confidence in global equities.
Finally, with the prospect of war, investors will continue to price in the possibility of an increase in oil prices that could have a detrimental effect on Euroland activity and thus corporate earnings. All of this spells a rocky outlook for investing in Euroland stocks.
Comparing the UK and Euroland economies, L&G shows the UK boasts a 3.1% unemployment rate while Euroland suffers at 8.3%.
According to Clare, the fiscal and monetary policy on the continent is not going according to plan. The European Central Bank's remit - to place a ceiling on inflation at 2% - has been broken in 24 of the 45 months of its existence. In the same period, however, the UK inflation has fluctuated between 1.5% and 2.7% which is well within the MPC'S remit to target 2.5% inflation, with a margin for error of plus or minus 1%.
With an equity market where the valuations look good and the economic fundamentals appear robust, L&G says that the UK market is the most promising.
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