There is a lot of bad noise surrounding Europe right now and when that happens, contrarian value managers start to smell blood in the water. The valuations of many great companies are at near-record levels which would normally be an indicator that it’s time to buy. Let’s take a look at some of the evidence.
A few interesting charts crossed our desk over the past week.
The first points out that Dutch bond yields are now at 500 year lows (Figure 1).
The second (Figure 2) is telling us that Europe has underperformed the US by over 3 standard deviations when measured over the past 20 year timeframe.
The pervasive fear enveloping Europe has opened up some interesting anomalies.
The market capitalisation of all Greek Equities is now the same as just one South African company - our own Aspen Pharma ($4.8bn). Aspen is around the 25th largest in our South African screening universe.
Across the pond, US bond yields also made 220 year lows during the week, a record that was set in November 1945. Truly interesting times.
Given the clearly Armageddon-like headlines emanating from the European region, these charts will likely surprise few people. What they might indicate however is the extreme pessimism that is currently being reflected in current market valuations.
History has taught us that stock markets are often very good at pricing the news headlines of the day. As Albert Edwards, a man often described as being a “perma-bear” points out, the macro environment always looks awful when the market is cheap. On the subject of bears, we listened with interest this last week to a thought provoking interview with financial historian Russell Napier titled “Uber-Bear sees Value in Europe”. To see this interview, please click here or go to video.ft.com/v/16559325 38001/Uber-bear-sees-value-in-Europe.
Napier, a self confessed bear himself, has recently become a European bull and points out that Europe is now close to the 1982 Cyclically Adjusted Price Earnings (CAPE or Shiller P/E) ratio lows which marked the start of the last great bull market (see Figure 3 below).
The chart below was struck in March of this year – updating the chart with the recent sell-off will show that we are moving even closer to those 30 year lows.
We agree with the view that valuation metrics do not give us an indication on the timing of the bottom of the market, although they do highlight where value might be found for above average future returns. They also highlight areas to look for potential significant margin of safety.
Please click here to read my colleague, Paul Bosman’s recent PSG Angle which gives a good example of a stock at the front line of this current pitched battle.
At PSG Asset Management we look to invest in great companies with excellent management and which are trading at very attractive valuations. Benjamin Graham, the “father” of value investing taught us that the time to buy is when there is blood in the streets. We at PSG Asset Management wonder whether, if we look back 5 years from now, that the current extreme conditions reflected in European equity markets might just have provided a great opportunity to buy some quality companies.
REF : written by Greg Hopkins PSG Asset Management
"The PSG Angle is an electronic newsletter of PSG Asset Management. "
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