While 2013 is showing early signs it could be another positive year for Australian and US stocks, there is one region which many investors are not looking at which could prove to be the most profitable of the three. This region also just happens to have some of the world’s biggest and best run companies listed on its exchanges.
You probably guessed it, I’m referring to EUROPE.
You see, many investors could consider this madness given all the economic turmoil that is going on over there. It seemed for most of 2011 and 2012 that all you heard about Europe was that Greece was going to leave the Euro, Spain was going to default on its debts and German banks were going to have to write down hundreds of billions of dollars off the value of their balance sheets. All this because bad loans were made to carefree spending governments. Not to mention that even today Europe continues to boarder on the brink of recession.
So why on earth would anyone consider an investment in Europe right now?
Well what if I was to tell you that in 2012, the best performing European stock market was in fact Greece of all places, with a total return of 33% (excluding dividends) despite 2012 being its 5th consecutive year in depression.
And what if I was to tell you that Germany, the economy which has had to shoulder the burden of all these bad debts was the second best performing stock market with a return of 29% for the year?
The fact is that despite what you might think, economic performance rarely has as much of an influence on the performance of shares as you might think. There are of course rare occasions when a systemic event may bring everything down, the GFC a recent case in point, but often the short term performance of a company’s shares will be just that, until companies are given time to adjust and adapt to the new environment. And that’s where the opportunity is right now.
For the past three years, companies in Europe have had to prepare themselves for this new and riskier environment. They’ve had to strength their balance sheets, cut costs and become more efficient. And with fear having gripped many investors in this region, blue chip shares in the region are cheap.
According to Stansberry and Associates Analyst, Brett Eversol, in April 2012 you could have bought European blue chip shares at their cheapest valuations in almost 20 years, the GFC aside. And despite some big moves last year, there is still plenty of room for them to move higher.
According to Brett, in a note he wrote to clients Monday 7 January 2013, when comparing valuations of shares in Europe, the world biggest economic block, to US shares, the world’s second biggest economic block, European shares are cheaper on almost all measures and by quite some margin.
See the table below…..
As the above table shows, and as Brett highlights in his note, based on price-to-book values, European blue chip shares would have to double in order to match the valuation of US shares.
Brett then makes the point, with European blue chip earnings expected to grow 11% over the next 12 months, the shares would have to rise 11% just to maintain the already very cheap valuations or otherwise these shares will get even cheaper.
But what would happen if European shares closed some of the valuation gap? Well then that would likely mean European blue chip shares would outperform US shares over the coming 12 months.
So what do the charts say?
(Source: HUBB Integrated Investor)
Right now the European Blue Chip share index, the Euro Stoxx 50, is rallying and the index is trading above its rising 35, 50 and 200 Day Moving Averages. BUT it is only just starting to do so. Despite the fact there will inevitably be bumps along the way, Europe could in fact be a great place to start looking for cheap blue chip shares to add to your portfolio.
For information on how you can take advantage of some of the world’s best investment opportunities, contact UGC for a No Cost, No Obligation consultation today.