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As the eurozone economy loses momentum, ECB policy could yet prove helpful

Not so long ago, investors were very certain that the eurozone was at last recovering, and doing so in a very robust way. No more. For exhibit a), see the collapse of Citi’s Economic Surprise index for the eurozone, which measures the extent to which the incoming data are exceeding or lagging expectations.

For exhibit b) note that Mario Draghi, head of the European Central Bank, has seen “a loss of momentum that is pretty broad based across countries and all sectors”. Europe’s extreme deflation scare is over, with inflation break-evens rising. But the strong recovery also seems to be over. Europe has been popular among investors of late, perceived as both cheap and growing. Was that wrong?

One bear who suggests that Europe is not in fact cheap is Chris Watling of Longview Economics. Median forward earnings ratios for Europe are back to where they were before the crisis, he points out. The proportion of stocks trading at more than 20 times earnings is at its highest since 2006, while the proportion trading at less than 10 is even lower than it was then. Overall, European stocks trade at 16 times trailing earnings, versus 23 times for the US, according to MSCI, but there are not as many true bargains for stockpicking value investors as these numbers imply.

Dirt-cheap European stocks are as hard to find as they were before the crisis. Further, using the median, thus cancelling out the leaden weight of Europe’s cheap utilities, and also the excitement around the justifiably more expensive tech stocks in the US, Mr Watling shows that the US is actually cheaper than Europe.

Even if European equities are not compellingly cheap, could this be a good time to buy? Jonathan Stubbs, Citi’s European equity strategist, suggests that his own bank’s surprise index could show a contrarian buying opportunity. When the macro has been very disappointing, stocks tend to be available a little too cheap. A surprise index of -70 or lower (it is now down to -90) is historically followed by good returns for the Stoxx 500. Europe has outperformed the US since March, buoyed by the weak dollar.

But the ECB dominates what happens next. Mr Draghi said very little on Thursday, but hopes are taking root that he will delay ending QE. Stock markets would like that.



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