1st April 2019
Schroders: Are investors too pessimistic on European shares?
European equities had a tough 2018 with the benchmark MSCI Europe index falling 10.6% over the year. Trade wars, reduced support from central banks and slower economic growth were among the factors that saw higher risk assets such as equities fall out of favour.
Despite the difficult global backdrop, the eurozone economy continued to expand in 2018, albeit with quarterly growth slipping to just 0.2% in each of the final two quarters of the year.
However, some European equity valuations have fallen to levels that imply we are already in a recession. The chart below compares the current price-to-earnings (P/E) ratio of the pan-European index, and individual country indices, to their P/E ratios in the last two recessions: the global financial crisis and the sovereign debt crisis.
P/E ratios are a common valuation measure and are calculated by dividing a stock market’s value or price by the earnings per share of all the companies within it. A low number represents better value.
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