We are buying this breakout!!

Hated by analysts, portrayed as “stagnant” and “sclerotic”, Europe could be at the start of a multi-year expansion.

Yes, Europe, best known for the “Euro crisis”, “Brexit” and overall political turmoil, has been quietly growing and may be one of the best bets for 2017 and beyond.

First, a historical perspective. In the 20 years before the financial crisis, European stocks have tracked US stocks in almost lock-step:

But according to Stansberry Research, since the end of 2008 US stocks have outperformed European stocks by approximately 150%!! This degree of divergence is unprecedented and has left European stocks trading on a forward Price-to-Earnings multiple of just 14x versus US stocks on 18x.

As Stansberry go on to explain, the last time US stocks outperformed European stocks by just 50% over an 8-year period was in 2002. Afterwards, between 2003 and 2007, European stocks returned 172% versus just 74% in the US.

They also mention that a similar period of outperformance happened in 1998, and European stocks jumped 64% in 18 months.

Today, European stocks are still close to the same level they were 10 years ago, while the US stocks are far above. Since the end of 2008, we are not talking about a 50% divergence in performance, but a 150% divergence!

From an Economic perspective, things are also looking good for Europe. Despite the negative headlines, ALL EU economies are expected to grow this year, and all of them grew in 2016 for the first time since 2007.

At the end of last year, the Eurozone economy posted 14 consecutive quarters of growth, the unemployment rate returned to single digits, and economic optimism was close to its highest level in six years. In February, inflation reached a 4-year high.

Compared to the US, the Eurozone grew faster in 2016 (1.7% vs 1.6%), and corporate profits are growing faster:

Many analysts like to focus on the political risks in Europe, such as the upcoming elections in the Netherlands, France, and Germany. However, as we saw with the UK’s vote to leave the Union, we think the economic impact of political events is often exaggerated.

While there are still problems within the EU, such as political uncertainties and peripheral countries’ weak banking sectors and high public debt, we believe the recent economic performance is set to continue and in fact is showing signs of strengthening.

Therefore, we see European equities as relatively cheap, with strong growth potential as the fundamentals continue to improve. Also, they likely stand to benefit from what appears to be the early stages of a sentiment shift that could lead to very high returns in the following years.

In short, Europe has all the ingredients of a good investment, and we are definitely buying.

If you want to learn how to invest in stocks and analyse the market to identify profitable and deadly turning points, contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email info@ugc.net.au to learn more about our Quality, Value, Trend (QVT) selection methodology.

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The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation and needs.

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