UBS: Europe's Value Rally already over?

The 3 key crisis Value Rallies faltered due to a lack of follow-on earnings growth and politics: Mar 09, Jul 12 and 11 Feb of last year (fig 1,6). These differed from the longstanding 2003 rally - driven by earnings. This summer the Value Dispersion gap hit a new high Value gaps biggest globally and Value beat Growth by 20% so we suggested a pause on 9 Jan. The pushback: "too early; trade has only just begun after years of neglect," etc. Below we differentiate our Tactical vs Fundamental call. Europe is rich with Value IF trailing earnings finally turn and politics settle.

TACTICAL: Why we hit pause on the Value Rally? 4 reasons

1) Value beat growth by 20% - in line with prior crisis rallies that averaged 23% (fig 6); 2) Rising 10-yr US bond yields helped, but yields had paused below peak & UBS forecasts US 10-yr bonds at 2.25% (end 17); 3) 12m forward EPS has already turned the most since 2009 (fig 2) we still want proof on trailing earnings; 4) Political risk is rife with the Dutch (15 Mar) and French elections (23rd April/round 1). The recent failure of opinion polls to predict - increases Europe's risk premia. Political calendar on pg 5.

FUNDAMENTAL: Still unusually big Value Gaps 'within' Europe

Europe had a rich rally and excess dispersion gaps fell by 2/3rds -but we agree that Europe's value opportunity remains elevated & the biggest globally. Plus, profit growth is key and Europe offers one of the biggest Base-Effects globally with profits still 28% below 2007 levels (US is 28% above) married with EPS momentum that is turning UP. STOCKS: Value that LAGGED peers in the recent rally include: Vinci, Capgemini, ENI, Telenor, Daimler & Renault, page 16.

FUNDAMENTAL: Europe cheap vs Regions (US) & Assets (Bunds)

1) Europe vs US: Relative CAPE PE is now up from crisis lows, (fig 24,25). Plus US vs EU ETF Equity flows hit a record gap of €237bn see Trump could help Europe & page 9. 2) The Bund vs Equity Total Return Gap of 75% (92% in Nov 16) is wide but shrinking. It makes no sense if inflation/profits are up and tapering follows. These gaps already closed fully in the US and partly in Japan, pg 11.

Die komplette Marktanalyse als PDF-Dokument.