European Equities: Fewer Bargains
European equities enjoyed a decent start to the new year, returning about 3 percent in the first quarter.
Several headwinds prevented stocks from heading higher: Tension between Russia and Ukraine, and fears of slowing economic growth in emerging markets–both of which have increased the uncertainty surrounding corporate earnings.
On a price-to-earnings basis, European equities trade at their highest multiple in more than a decade; earnings growth will be critical to push stock prices higher and convince the market that shares aren’t expensive.
With the ratio of capital expenditures to sales at a 30-year low in Europe, an increase in investment appears imminent.
Although some of the parameters that affect capital spending have evolved–for example, expanding operations in lower-cost markets–a strengthening EU economy should encourage companies to invest in future growth.
Against this backdrop, the direction of EU economic indicators is more important than the absolute numbers.
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