Investment Desk Bulletin

21 February 2017

Equities: 1) Are European Equities cheap? 2) A new era... US policy changes

IDB 21 02 17

By Renata Klita and Jamie Geffin

In this week’s IDB, we firstly question whether European Equity valuations are cheap in comparison to the US, the potential reasons for this and whether momentum is predicted to change in 2017. In the second half of the presentation we consider the US, and after a month in office, how President Trump’s policies are forecasted to effect markets.

European Equities have underperformed the US since 2014 and valuations appear cheaper on some metrics including price-to-earnings and price-to-book ratios.

Europe is the only region where earnings momentum is both positive and still accelerating. Growth expectations need to materialise but we believe this is likely to happen based on the strong macroeconomic backdrop; resilient consumption, business optimism and the rebound in exports.

London & Capital are invested in Europe; our stocks are primarily large market capitalisation stocks with significant non-EU revenues, which have been benefitting from the stronger dollar. Following the European election cycle, it is possible Euro weakness may reverse; at that point we are likely to focus on domestic exposure.

There are still high amounts of uncertainty regarding President Trump’s policy agenda – which policies will be approved and their impact upon markets. According to our analysts, earnings per share (EPS) forecasts are yet to factor in a positive impact and have room to be revised upwards. At London & Capital we have positioned ourselves to capture potential upside from policy changes by observing Trumps proposed plans for future spending and investing accordingly.