While Europe Plays Catch-Up, Valuations Look Attractive | Capital Group


Quarterly Outlook

GLOBAL GROWTH  |  International  |  October 2015
While Europe Plays Catch-Up, Valuations Look Attractive

Aggressive Stimulus, Accelerating Growth Could Boost Earnings for Some Companies

“We have some very strong cyclical tailwinds hitting the European economy at the moment. We have low oil prices, looser monetary policy by the European Central Bank and we have a cheap euro. I believe these tailwinds can keep a robust growth momentum in the euro area for some time.”

Jens Søndergaard Economist London office 11 years of experience (as of 12/31/16)

The Euro-Area Economy Is Just Now Nearing Its Pre-Crisis Peak, but the Growth Rate Has Been Picking Up

*Forward price-to-earnings ratios for each market using forecasted earnings.

Sources: FactSet, RIMES

The developed world appears to be hitting its stride. The U.S. economy recently was more than 10% bigger than it was before the start of the global financial crisis. Since that time, economic recovery in Europe has proceeded at a much more muted pace, but as you can see in the chart, euro-area GDP has just recently approached pre-crisis levels.

More recently, however, the recovery in the euro area appears to be gaining traction. And there are a number of tailwinds that could support accelerated growth. Both Europe and Japan are benefiting from accommodative central bank policies — at a time when the U.S. Federal Reserve is poised to boost short-term interest rates. A weaker currency and lower oil prices could further boost euro-area growth.

Given the improving economic backdrop — and that forward price-to-earnings ratios suggest European companies offer more attractive values than U.S. firms — select European firms may offer better return potential going forward.

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