Europe: Time to be Greedy?

Is now a good time to invest in Europe and if so which European markets look the best?

The table below summarises the current data:

 

Country	Index	Div	Growth	High	Recent	Off Peak		PE	Return
Switzerland	SMI	2.90%	1.25%	9548	6147	-36%		13.1	2.86%
Sweden	OMX Stockholm	3.58%	1.60%	1322	1014	-23%		12.2	4.38%
Germany	DAX	3.02%	1.05%	8152	6419	-21%		10.0	5.49%
Netherlands	AEX	3.17%	0.15%	564	311	-45%		9.8	5.64%
France	CAC40	3.70%	0.75%	6168	3135	-49%		9.7	6.35%
Belgium	BEL20	6.08%	0.40%	4759	2198	-54%		11.8	6.58%
UK	FTSE100	3.79%	1.40%	6754	5608	-17%		10.0	6.62%
Europe	EUROSTOXX50	4.56%	0.30%	4573	2228	-51%		9.8	7.11%
Italy	FTSE MIB	3.94%	-1.10%	44364	13584	-69%		7.7	8.24%
Spain	IBEX	12.13%	-0.85%	16040	6630	-59%		8.2	15.69%

 The table gives:-

• The current dividend yield for each country (MSCI Index yields were used as an approximation)
• The average annual growth rate based on IMF forecasts for the next 2 years.
• The 10 year high for each market and the recent close. The off peak figure shows the percentage below the 10 year high.
• The Price Earnings ratio
• The estimated annual future returns based on our model (see here for a summary)

The chart below shows the estimated annual returns:

Switzerland

The Swiss market currently looks the most expensive and not being part of the Eurozone is added as a benchmark. The Swiss market consists mainly of health care (29%), consumables (27%) and financials (18%). Nestle makes up 25% of the index with Novartis (pharmaceuticals) making up 14%. The finance sector is dominated by Swiss banks such as UBS, Credit Suisse along with Zurich and Swiss Re.

Sweden

Next up is Sweden. The largest stock in the index is H&M making 11% of the market. Other household names include Ericsson (9%) and Volvo (5%). The Swedish market is dominated by industrial (29%) and financial (26%) stocks.

The market has performed well and looks strong and is only 23% off its 10 year high.

Germany

The DAX is very well diversified. Main industries include; consumables, materials, financials, industrials and health care. Siemens is the biggest stock with the world's largest chemical company BASF at number two. Others include Bayer (the inventors of aspirin), SAP (worldwide commercial software company) and Daimler (the owners of Mercedes Benz). Clearly these are some international giants who derive a good proportion of their revenues from outside Europe.

Pretty similar to the Swedish market. Currently about 21% off its 10 year peak.

Netherlands

A fairly small market. The Dutch market is heavy on consumables including Unilever and Heineken. Financials make up 17% with ING the main company in this sector. Electronics company Philips is also included in the index.

The long term trend looks pretty negative. It's currently trading 45% off its 10 year high and 53% off its 2000 high.

France

The returns now are starting to look more interesting. The French market is very diversified. Big stocks include Total Oil, Sanofi (pharmaceuticals), LVMH (luxury goods), BNP Paribas (banking), and food producer Danone.

The French market is trading near its lows and being one of the bigger EU economies (and the world's) it could be a case of too big to fail. At these levels the French market looks attractive.

Belgium

A minnow compared to some of the others but the Belgium market does have a high yield of over 6%. Belgium's market is dominated by AB InBev, the worlds largest brewery and owner of Budweiser. 45% of its sales come from North America. 22% of the Belgium market is in the financial sector.

UK

A surprisingly well diversified market. Since the collapse of the big banks in 2008 the finance sector makes up just 22% of the market. Energy remains one of the major industries with the likes of BP and Shell. HSBC is the main financial company. British American Tobacco, GlaxoSmithKline (pharmaceuticals) and Diageo (owners of Guiness, Baileys, Smirnoff, Johnny Walker, etc)

Italy

Now we are getting to the marginal European economies. The Italian market is made up of 35% energy and 18% utilities which don't sound that risky. Financials make up 25% of their market. The main stock which constitutes 26% of the market is oil and gas producer Eni (you'll recognise the logo if you don't know the name).

The Italian market has taken a Japanese style battering and is currently 69% off its 10 year peak and 73% below its 2000 high of over 50000. This certainly limits the downside risks. IMF growth forecasts for Italy are negative and I would want to see some positive price action (100 day highs breaking) before moving in.

Spain

Finally Spain with a whopping 15%+ estimated return. The Spanish market is dominated by financials (currently 39% of the index) and the largest of these, Santander bank, pays a suspiciously high dividend of almost 13%. To be fair the back does have large operations outside Spain, notably in the UK and Latin America. Santander's share price is only (!) 50% off the pre credit crunch highs so potentially it could fall further and maybe not all negative forecasts have been factored into the price. Elsewhere in the index Telefonica makes up 19% of the market and oil company Repsol about 5%.

The market looks very weak and is below its 2009 lows.

Summary

For me the high financial weighting in the Spain market makes it look risky. Italy looks better as the sectors are less cyclical, but I would want to wait for some price confirmation before entering.

The FTSE and the CAC both look good value and are fairly well diversified (the CAC more so than the FTSE). The EUROSTOXX 50 index with includes the biggest 50 companies in the EU could be the way to go. The expected return is currently over 7%. The index is around 21% financials which is fairly high and Santander is the biggest of these and constitutes 3.3% of the index. The index includes all the big EU stocks (excluding UK) and is over 50% off its 10 year high so there is plenty of potential upside.

The weak price action carries less significance as the index covers many countries and industries and the current weakness could represent a good buying opportunity.