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By Kit Rees
LONDON Feb 9 After years of underperformance, a
long-awaited turn in European earnings and some of the cheapest
valuations relative to U.S. in 40 years, could lure investors
back into the region's equities, according to strategists at
Bank of America Merrill Lynch.
Sub-par earnings growth, profit margins and return on equity
combined with growing political risks have clouded the case for
European stocks in recent years keeping investors away.
Meanwhile, U.S. company profit margins are at record highs
while earnings have outpaced European peers by 76 percentage
points since 2009, according to BAML.
That has powered U.S. equities to record highs this year and
on some metrics such as price-to-book now stand at close to a
40-year high relative to Europe, BAML said.
European earnings could be at an inflection point following
the brighter outlook for commodity-related stocks and
financials, two sectors that have big weights across regional
Earnings growth in Europe is expected to clock in at 14
percent this year, according to Thomson Reuters I/B/E/S. Profits
fell in four of the past five years. reut.rs/2553txN
The latest quarterly reporting season is shaping to be a
healthy one. Of the 90 STOXX 600 companies which have
reported earnings to date for Q4 2016, more than 53 percent have
beaten analyst estimates. In a typical quarter, 49 percent
exceed analyst EPS predictions.
So far, the pan-European STOXX 600 index has
rallied almost 1 percent in 2017, as the so-called "reflation"
trade gathered pace.
The caveat to the optimistic outlook, however, remains
Elections in the Netherlands, France and Germany and the
trigger of Brexit talks in the U.K. could present potential
bumps, BAML strategists warn.
Likewise sovereign risks also lurk - Greece's debt woes are
still a cause for concern as is Italy's banking
"Some clarity on these risks seems likely by late 2017 and
in fact perceived political risk could turn positive if more
reform-minded leadership is in place in some of the major
European governments," BAML's strategy team said.
"In the short term, however the trajectory for Europe’s
performance relative to the U.S. is likely to be somewhat choppy
until the political uncertainties clear."
(Editing by Vikram Subhedar)