European stocks have clawed their way out of the bargain bin since we highlighted our favorite value plays in Continental Comeback and Destination Europe. Continental equities trade at about 1.8 times book value, above their long-term average.
However, we foresee more upside for our favorites, as strengthening corporate earnings should fuel price appreciation and start to close the valuation gap with US equities.
A welcome tailwind will come from the ECB’s stimulative policies, which should undermine the euro’s value relative to the US dollar.
Such a development would bolster EY exports and give publicly traded European companies–30 percent of which boast a net cash position–ample opportunity to invest and take advantage of improving demand.