Do Longer-Term Metrics Make European Stocks More Attractive?

August 30, 2012

Most investors are familiar with the PE ratio as a metric of valuation. This metric divides the current stock price by trailing twelve month earnings. In effect, it measures how much an investor pays compared to the amount of earnings a company or index provides. As a measure of valuation, PE can be heavily influenced by the cyclical nature of earnings. To smooth out fluctuations due to cyclicality, one approach, popularized by Robert Shiller, is to divide equity index prices by ten-year average earnings. The measure, known as the Cyclically Adjusted PE (CAPE), can provide an indication of when markets are exceptionally over or undervalued.

This week’s Chart of the Week shows CAPEs for market stock indices of 47 countries including the United States. The U.S. comes in at the middle of the pack, with a CAPE of 19.6. This is much higher than the trailing 12-month PE of 13-14, due to the large declines in earnings suffered over the last ten years. Perhaps unsurprisingly, the countries with the lowest CAPEs reside in peripheral Europe. Greece, with a CAPE of 3.0, looks extremely undervalued by this measure. Spain and Italy, which are both home to large multinational corporations, have CAPEs just below 10. The Netherlands, which is a net lender in the Eurozone, has a CAPE below 10.

Of course, while low valuations have tended to precede strong long-term performance, this is by no means guaranteed. Additionally, given the ongoing nature of the Eurozone crisis, short-term performance of European equity markets is likely to be choppy at best. The Athens Stock Index, for example, is down 49% over the last year alone. Still, on a relative valuation basis, European equity markets look attractive compared to other countries for long-term investors.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Related Content

04.11.2024

First to Cut: The Fed or the ECB?

Based on implied probabilities derived from options markets, investors are currently forecasting an 82% chance that the European Central Bank…

04.10.2024

1Q 2024 Market Insights Webinar

— LIVE WEBINAR APRIL 25 — Please join Marquette’s research team for our 1Q 2024…

04.01.2024

Sweet and High Up

Chocolate eggs and bunnies may have appeared more expensive to shoppers this Easter weekend, as the price of cocoa futures…

03.27.2024

The Crystal Ball Has Clouded

Last month, Marquette published a Chart of the Week that highlighted the aberrational length of the current…

03.21.2024

The Dynamic Duo

In 2023, investors were stunned by the robust performance of seven prominent mega-cap stocks deemed the “Magnificent Seven.” Largely beneficiaries…

03.12.2024

The DPI Lie?

There are multiple ways to gauge how private markets managers are performing, such as benchmarking returns relative to their peers…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >