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European firms are still cheap

THE year has not got off to a good start for continental Europe. Exporters were stung by a strong euro at the start of the year before fiscal turmoil in Greece cast doubt over other heavily-indebted Club Med countries’ stability. To top it all off, its economic recovery appears to have stalled. From a macroeconomic perspective, the case for investing in European equities hardly appears to be stacking up. And the recent stock market rally might make you think that equities are no longer attractively priced.

But contracts for difference (CFDs) traders shouldn’t write off the European stock market so quickly. Although it is not as cheap as it was one year ago, its historical price-to-earnings (p/e) ratio is currently trading around 19 to 20 times, compared to its historical long-run average of roughly 17.5 as a result of the equity rally in 2009. State Street Global Advisers’ (SSgA) Marcus Schulmerich says that earnings growth is supporting these current valuations.

The price-to-book ratio of European equities suggests that while stocks are not as cheap as they were, they are still trading at a discount to UK and North American equities and even emerging market stocks. This means that there are still opportunities for traders to pick out stocks that remain attractively valued.

And CFD traders should use the stalled recovery to their advantage – if the recovery hasn’t happened yet then you are picking up positions at a much earlier stage in the cycle. But Nick Williams, head of Baring Asset Management’s pan-European small and mid cap equities team, says that investors have to ask themselves which sectors have already discounted the recovery. “The upside is not in the industrial cyclical stocks because they are already including some recovery in their valuations. The ones that look really cheap on both a European and wider stage are tech-related such as IT services and also consumer discretionary,” Williams says.

Going long on the consumer discretionary sector might seem somewhat odd at a time when Eurozone economy is stalling, but the recovery has not been priced into the sector – once the profits have appeared it will be too late.

Core European economies such as Germany and France should still perform well in the end and solid firms with strong market share and high profile brands will be valuable in the long-run, even if they aren’t now.

CFD traders should try to stay ahead of the game and get in there now before these companies begin reporting good figures.