Capital Ideas

Investment insights from Capital Group

After strong rally, value remains in European equities

Yield spread between European stocks and bonds has widened

Europe’s equity returns lagged those in the U.S. for much of the last decade, but Europe took the lead in 2017 on a dollar basis. The strong rally has narrowed a once wide valuation gap between the two markets, but value should remain in European stocks. This is particularly clear when comparing yields between European equities and bonds. While bond yields remain near historic lows, the MSCI Europe Index’s dividend yield has drifted higher over the last 15 years. In the past, European equities may not have been a compelling option for investors seeking additional income in their portfolios, but in today’s low yield world they increasingly make sense. With economic activity picking up and many political headwinds in the past, the European equity rally may have more room to run. 


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