The Weekly View: Eurozone: Ugly Headlines, Resilient Data
Comment of the Day

May 06 2016

Commentary by David Fuller

The Weekly View: Eurozone: Ugly Headlines, Resilient Data

My thanks to Rod Smyth and colleagues for this latest edition of their excellent letter, published by RiverFront Investment Group.  This issue is written by Chris Konstantinos, and here is a brief sample from the opening:

The Eurozone is not an easy story to believe in.  Years after the onset of a credit crisis that continues to test cultural and economic resolve, the region is still the setting for some of the world’s ugliest news headlines.  Terrorism, questions of solvency in the banking system, and a still-simmering migrant crisis are but a few items that have assaulted markets in recent months.

As value investors, we believe that sustained ugly headlines over time can create attractive entry points for assets.  We tend to think that bad news eventually begets cheap prices, which begets outsized future returns.  RiverFront’s Price Matters asset allocation process is suggesting that, at current prices, developed international stocks (including the Eurozone) offer attractive potential 5- and 10-year forward returns, if history is any guide.  (See our Strategic View, dated 3/2.16, for more on this topic.)

However, many investors are understandably asking us a different question: why do we believe that any of this value is set to be realized over the next 12 months?  After all, valuation can be a poor timing tool, and being “early” in the portfolio management business is the same thing as being wrong.  The purpose of today’s Weekly View is to lay out a transparent framework for some of the recent data that informs our preference for Eurozone stocks, as well as to show how we monitor risks to our view.

David Fuller's view

Here is a PDF of The Weekly View.

This is an intelligently written and credible analysis, even though most investors will be in agreement with the opening sentence above.  We can thank ‘Super’ Mario Draghi of the ECB for most of the improvement cited, and not just recently.  He should be there for at least another three years before his term expires in October 2019, assuming he can tolerate the masochism.  However, Germany has already signalled that it wants to take control of the ECB, for better or worse, when Draghi leaves.

Chris Konstantinos is right that valuations in Europe are generally lower than in the USA.  Moreover, there is plenty of corporate talent in the EU region, even if this experiment in creating the ‘United States of Europe’ is currently heading towards the rocks.

RiverFront’s team has plenty of technical and fundamental skills, so they have the potential to fish selectively and successfully within the troubled EU.  Will they outperform commodity shares or just the commodities themselves over the next two years?  I doubt it but these two sectors are not mutually exclusive.     

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