Everything looks pretty bleak at the moment, but we think it’s important to keep things in perspective and recognise opportunities when they arise.
The market is an efficient mechanism for pricing near term macro-economic sentiment and the current drawdown is no exception. Europe is in the eye of the storm, notably with proximity to the Ukraine war and its direct dependence on Russian energy. But in truth, the ramifications of the war are global in nature and energy prices will likely equilibrate around the world over time. Chinese lockdowns persist and constrain domestic consumption and global supply chains, while enhanced tensions between China and the US could have long lasting implications for the global economy.
Indeed, with a higher level of unemployment, it’s possible that the inflationary pressures affecting all economies could be less severe in Europe than in the US or the UK. European Central Bank tightening has been far less aggressive than either the US Federal Reserve or the Bank of England have had to be.


But is now the time to buy Europe? It is hard to be sure, it always is, but we think there are some interesting data points that are supportive.


1. Everyone is bearish. European consumer confidence is the lowest it has been since the data was recorded (1985), and by some margin. What is interesting is how the market has historically performed following a bottoming of consumer confidence (not when confidence is positive, just when it becomes less negative). At each of the previous turning points in confidence the market has delivered strong double-digit returns over the subsequent 12-month period. We do not know if we are at the bottom, but if history rhymes there is cause for optimism.

Source: Bloomberg, as at 30/09/2022 

2. Absolute valuations are low. Rising bond yields and a deteriorating growth outlook have taken their toll on European valuations with forward P/E ratios back to where they were in the Eurozone crisis.  

Source: Bloomberg, as at 30/09/2022  

3. Significant discount to US. As discussed above there may be justifiable reasons for US companies to trade at a premium, although a strong US dollar is not one, but the discrepancy is now as extreme as we have seen. On a forward P/E basis the US market (S&P 500) is trading at a 44% premium to the European market (STOXX Europe). This compares to an average premium of 19% (since August 1995). 

Source: Bloomberg, as at 30/09/2022 

Even more stark is how the two markets have traded relative to their respective long bond yields (approximate risk-free rate). Below we have charted the spread between the earnings yield of the index and the long bond yield. The US market currently yields just 2.8% above the ten-year. By contrast Europe now yields 7.4% more than its equivalent bond. This 4.6 percentage point difference between the two markets seems too compelling to ignore.  

Source: Bloomberg, as at 30/09/2022 

A word of caution. While it is indeed darkest before dawn, it could well be a very cloudy day ahead of us. Pressures on corporate earnings are mounting. Input, labour and financing cost inflation is damaging corporate profitabilty, while the rising cost of living and general uncertainty about the future are starting to damage consumption.


Nevertheless, it is our firm view that the best long-term returns tend to come from companies with sustainable pricing power and resilient business models. Times of economic uncertainty are when these businesses really prove their worth. 

The value of active minds: independent thinking


A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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