Latest from the Quantamize Blog

Which European Countries' Stocks Offer the Best Value

Nov 07, 2018


  • As we move past the US mid-term elections, we take a look at how stocks are trading in Europe. As seen in the graph below, we compare the next-twelve-months price/earnings (NTM P/E) against last-twelve-months return on equity (LTM ROE) for 11 indices in Europe to better understand how stocks in European countries are priced relative to their ability to generate returns.
  •  Our analysis of European stock markets looks at two indices that track general European stocks: The Euro Stoxx 50 is a basket of 50 blue-chip stocks across Europe that are leaders in Europe’s most notable sectors while the STOXX Europe 600 is a basket of 600 small, mid, and large-cap stocks from 17 countries across Europe.  
  • The remainder of our analysis focuses on the 9 largest economies in Europe by selecting indices that track stocks specific to their respective countries -- these countries include Germany, the United Kingdom, France, Italy, Russia, Spain, Netherlands, Switzerland, and Sweden.
  • Our analysis reveals that Italian stocks, as represented by the FTSE MIB Index which tracks the 40 most-traded Italian stocks, and Russian stocks, as represented by the MOEX Russia Index which tracks the 50 most-traded Russian stocks, are the cheapest priced stocks in developed Europe. 
  • It is no surprise to see that Italian stocks are priced cheaply relative to European peers, as investors have sold Italian stocks amidst concerns of a growing budget deficit for the Italian government. Fears of a growing Italian deficit have caused Italian bond yields to spike, resulting in a higher discount rate for Italian stocks that will cause lower risk-adjusted returns.  
  • Russian stocks are by far the cheapest priced among those in Europe with the MOEX Russia Index maintaining an aggregate LTM ROE of 14.5% while its aggregate NTM P/E is a minimal 5.6x. Russian stock valuations are hurt by investors selling the Russian Ruble in response to US sanctions on Russia in 2018 -- the Russian Ruble has depreciated 12.4% against the US dollar so far in 2018.
  • Among the most expensive stocks in Europe are Swiss stocks, as represented by the Swiss Market Index which tracks 20 of the largest and most liquid large and mid-cap Swiss stocks, and Swedish stocks, as represented by the OMX Stockholm 30 Index which tracks 30 of the most-traded Swedish stocks. 
  • Both the Euro Stoxx 50 and the STOXX Europe 600 are just off the line-of-best-fit for the 11 European indices selected, indicating that the constituents of these two indices are a strong representation of overall European markets.


Source: Bloomberg