Valuation alone is no longer the argument in Europe

The Daily Instagraph is back after the holidays.

The valuation case for European equities has become less straightforward. The STOXX Europe 600 is now trading at around 14.8x forward earnings, compared with a 20-year average of 13.4x. Europe still trades at a discount to the US, but this discount has narrowed materially after the strong performance of recent months.

The conclusion is not that European equities have become unattractive, but rather that the broad valuation argument is no longer sufficient on its own. With multiples back around historical levels, future returns will increasingly have to come from earnings growth and, above all, from identifying the right companies.

This is the approach we follow in our European Value Fund, where we look across industries for businesses whose underlying earning power we believe is not properly reflected in the share price. We invest when this discrepancy is sufficiently large to offer us a meaningful margin of safety, rather than relying on a general rerating of the European market.

In the current environment, selectivity matters more than the market call itself.

Have a valuable day.

Disclaimer: This communication is provided for information purposes only and does not constitute investment advice, an offer or a recommendation to buy or sell any financial instrument. Past performance is not indicative of future results. Investments involve risks, including the possible loss of capital.