Thursday, November 7, 2013

More Upside for Euro Zone’s P/Es? (excerpt)

What’s up in Europe? Forward P/Es are up a lot since the summer of 2011, when there were still widespread fears that the euro zone might disintegrate. Those fears evaporated one year later when ECB President Mario Draghi pledged to do whatever it takes to keep the euro zone intact. The forward P/E for the Europe ex-UK MSCI bottomed at 8.3 during the summer of 2011. It is now up to 13.6, matching the 2009 high.

The rebound in forward P/Es has been widespread among the major stock markets of the euro zone. They are mostly back to 2009 levels prior to when Greece hit late that year and early in 2010. In other words, investors no longer seem to be worrying about a “Grexit” or any other threat to the integrity of Europe’s monetary union. The question is whether there is more upside for the region’s valuation multiples.

I think there might be, but forward earnings, which has been flat-lining since 2011, as I noted yesterday, needs to show some signs of life. That, in turn, requires that European economic indicators show that the region’s economy hasn’t just bottomed, but is actually recovering. The latest batch of these indicators does show a recovery, but a slow-paced one that may already have been discounted by the rebound in valuation multiples.

Today's Morning Briefing: Sentimental Journey. (1) Stampeding bulls. (2) The Bull/Bear Ratio jumps to 3.54. (3) A melt-up signal: Rising BBR and rising stock prices. (4) Q3 earnings season didn’t lower bullish 2014/15 earnings estimates. (5) Next big deal from the Fed: Less QE-Forever, More NZIRP-Forever. (6) Rosengren sees full employment at 5.25% unemployment rate. (7) A Fed model recommends lowering jobless threshold from 6.5% to 5.5%. (8) An idea whose time is coming. (9) Investors no longer worrying about euro disintegration. (10) Is there more upside for euro zone valuations? (More for subscribers.)

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