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Global Top Cat

Europe: Selectivity is Key after Recent Rally

By Yiannis G. Mostrous, on Apr. 17, 2014

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.

Taking Profits on Old Picks

In August and September 2013, we highlighted our favorite plays on Europe’s economic turnaround in Continental Comeback and Destination Europe.

Here’s a quick review of how these picks have fared and our ratings:

  • Adecco (Zurich: ADEN, OTC: AHEXY)–Sell for 12 Percent Gain
  • Intesa Sanpaolo (Milan: ISP, OTC: ISNPY)–Sell for 60 Percent Gain
  • iShares MSCI France Index (NYSE: EWQ)–Sell for 14 Percent Gain
  • iShares MSCI Italy Index (NYSE: EWI)–Sell for 30 Percent Gain

New Picks in the Old World

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