Investors find value in Europe’s sovereign debt crisis, Bernstein

The sovereign debt crisis in Europe has caused equity investors to flee the continent but the exodus has set up an attractive opportunity for value investors, according to Tawhid Ali, director of research at Bernstein European Value.

“By the end of September, European stocks were trading at a 16% discount to global equities based on price/book value, well below their average of the last 24 years. On price/forward earnings, the euro area discount is about 13%, not as provocative but still worthy of attention,” Ali said.

Opportunities are to be found especially for value investors.

Ali noted that spreads between the cheapest and most expensive euro-area stocks are wider than at any time in the last four decades except the tech bubble in 2000, and in the past, when valuations have moved back towards their long-run average levels and this spread has narrowed, attractively valued stocks have outperformed strongly.
“Wide valuation spreads can be found in almost every sector, which means you don’t have to concentrate holdings in specific areas such as cyclically sensitive stocks in order to position a portfolio for a value recovery,” he said.

Excluding Greece, Italy, Spain and Portugal, Bernstein’s research found that the cheapest quintile of non-financial stocks has a net debt to equity ratio of 70%.
“That’s 32% lower than its 30-year average. For these stocks, free cash flow is also surprisingly strong, ranking in the top quintile of the last three decades,” Ali said.

Meanwhile, the threat of a sovereign debt default has been alleviated by recent European Central Bank moves, along with the progress made at various European Union summits in recent months.

Structural reform is the trickiest part, Ali added.
“But given that we’ve seen significant progress on the first two components of reviving confidence, I think that further progress on structural reform in the periphery may be catalysts for a recovery in equities,” he said.

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