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Is Now the Right Time to Invest in European Equities?

As we stand at the midpoint of 2024, the question of whether now is a good time to invest in European stocks has become more pertinent than ever. Europe presents a unique investment opportunity, particularly when we examine its current valuation relative to other major markets. However, making informed decisions requires understanding the multifaceted issues influencing the Euroe Zone markets. Let's dive into four key factors that we currently believe should be on every investor's radar.

1. Valuation Discounts: A Historic Opportunity?

European equities are currently trading at one of the largest discounts to US stocks in recent history. The Euro Stoxx 600 index, for instance, is hovering near the 15th percentile of its forward earnings multiples for the past decade, a level seen only during the global financial crisis and the European debt crisis (Exhibit 1). Comparatively, the valuation discount between the Euro Stoxx 600 and the S&P 500 has widened to approximately 35%, a stark contrast to the 5-20% range observed between 2005 and 2020 (Exhibit 2).

This valuation disparity is particularly pronounced in mid-cap companies, which historically traded at a premium but are now at a significant discount to their large-cap peers (Exhibit 3). The potential for these valuation gaps to close through market recovery or increased corporate activity makes European mid-cap stocks an attractive target for astute investors.

2. Geopolitical and Economic Headwinds

Investing in Europe is not without its challenges. The region has faced a series of economic and geopolitical hurdles, including Brexit, the Ukraine conflict, and fluctuating energy prices. These factors have contributed to a risk-averse sentiment among investors, reflected in historically low levels of corporate activity. For example, the volume of IPOs in Europe is at one of its lowest points in three decades (Exhibit 4), with M&A activity also significantly subdued (Exhibit 5).

However, recent trends suggest a shift might be underway. Interest rate expectations are beginning to stabilize, and there are early signs of a rebound in high-yield issuance, which could provide the necessary liquidity for increased corporate activity (Exhibit 6).

3. Green Shoots of Recovery in Corporate Activity

Despite the current malaise, there are encouraging signs that the tide is turning. Over the past six months, M&A activity in Europe has shown signs of recovery, with an increase in the average premium paid for acquisitions (Exhibit 7). This mirrors the post-global financial crisis period when opportunistic buyers took advantage of attractive valuations.

Additionally, European companies are increasingly engaging in share buybacks, reaching levels not seen in two decades (Exhibit 8). This indicates a belief among corporate insiders that their stocks are undervalued, further supporting the case for a potential market upturn.

4. Fund Flows and Investor Sentiment

Relative fund flows have seen significant outflows from Europe into the US and emerging markets over the past five years, contributing to the current valuation discounts (Exhibit 9). However, there are indications that this trend is slowing, with fund outflows from Europe beginning to taper off in 2024.

The abundant cash reserves held by European corporations and private equity firms, combined with an improving financing environment, suggest that there is plenty of dry powder ready to be deployed. This could lead to a resurgence in investment and corporate activity, further bolstering the European market.

European Equities - Seize the Opportunity?

Given the current landscape, European equities appear to be on sale, presenting a compelling opportunity for investors willing to navigate the complexities of the market. The historical valuation discounts, combined with emerging signs of recovery in corporate activity and a more stable economic outlook, suggest that now might be an opportune time to invest in European stocks.

If you are considering diversifying your portfolio and taking advantage of these market conditions, we are here to provide expert guidance and support. Our team can help you navigate these issues and develop a strategy tailored to your investment goals. Contact us to learn more and discuss how we can assist you in capitalizing on these opportunities.


Royce Advisory Pty Ltd (ABN 43 622 402 706) is a Corporate Authorised Representative (CAR) of MB Capital Partners Pty Ltd (AFSL 536053). This article, commentary and discussion is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or particular needs. You should consider whether the information is suitable for your circumstances and where uncertain seek further professional advice.

This communication is based on information from sources believed to be reliable at the time of its preparation (June 2024). However, despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice and neither Royce Advisory or MB Capital Partners is not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.

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