US equities are more attractive on a risk and return basis than European equities or even Asian ones, despite the end of quantitative easing in the US and its beginning in the eurozone.
This is the conclusion of Libra Investment Services’ most recent valuation analysis. The firm determines fair value on the basis of five variables from a company’s income statement and balance sheet: sales, cash flow, earnings before interest, tax, depreciation and amortisation (EBITDA), earnings and book value.
Rather surprisingly, its analysis shows that most sectors in Europe look fully valued on a net discount to fair value basis, and therefore return prospects are poor.
This is because macroeconomic news continue to dominate sentiment in the markets, in Europe in particular.
Last week, the European Central Bank (ECB) launched its long-awaited quantitative easing programme, exceeding expectations by investors but increasing risks of a currency crisis further down the line.
On Monday, the victory of left-wing Syriza party in Greece looked set to add to the euro’s negative momentum.
A week before the ECB’s QE announcement, the Swiss National Bank scrapped the peg of the Swiss franc to the euro. The Swiss currency appreciated sharply, sending shockwaves through the markets and making victims among currency brokers and borrowers.
Chris Tinker, co-founder of Libra Investment Services, noted that the markets are now positioned for the longer-term consequences of a continuing decline in the euro.
For European equities, this means that investors who had regarded Europe as unattractive are “being forced to play catch-up and scramble to return positions to at least a neutral weighting,” he said.
“The consequence for those already invested is that Europe is now acting as a highly correlated momentum market, and while this is providing a positive impetus to the start of the year, investors are going to find it increasingly hard to identify value opportunities at this level.”
Asian equities, meanwhile, are also beginning to show signs of being fully valued, and are “too exposed to shifting momentum.”
By contrast, US equities have “yet to get going this year,” according to Tinker. The S&P 500 is trading at a small discount to fair value (DFV), despite the fact that 79% of the companies that reported earnings have beaten estimates so far.
“The market has struggled to match its highs for the year and remains at a discount to fair value. It does not look expensive at either a market level or in terms of the sector level 12-month net DFV,” Tinker said.