Buy European shares on valuation grounds alone, managers urge

Ever more asset managers are saying it is worth buying European shares on valuation grounds alone, even if the region’s public debt is at crisis levels.

In promoting the case for cheap European shares, Lombard Odier Darier Hentsch points to Italy, where the price of markets compared to their own 10-year average earnings (essentially a ‘price-to-very-long-term-earnings-ratio) is 72% below its historical average since 1969.

But Lombard says the case is similar in Spain, France and Germany, “whose Graham & Dodd multiples all stand between 35% and 57% below mean. No one can deny the extreme cheapness of European markets”.

If price-to-peak-earnings ratios return to their median in 10 years, investors will enjoy over 13% a year, the manager said.

Investors seem to be ignoring this.

Last year European equity funds suffered the second highest redemptions among categories available to European investors, who pulled €13.2bn from them in 2011, according to Lipper.

But Neil Dwane, manager of the Allianz RCM European Equity Income fund, suggests this might be a mistake. European bond holders will lose out to equities if central banks “promote economic growth and inflation,” he says.

The case for European equities is also strengthened as economic news improves, as expected in 2012 by Barry Norris, manager of Ignis Argonaut European Alpha fund. “Expectations of European economic growth have troughed and we will see upgrades to 2012 estimates from here.”

Some houses have already boosted their economic prognosis.

ING Investment Management increased its forecast for eurozone economic growth from -0.5% to 0.3% for 2012.

Willem Verhagen, senior economist, said: “The eurozone politicians are slowly but consistently approaching a solution to the sovereign debt crisis, and this shows itself clearly through the favourable general conditions for banks and sovereign debtors.



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