Barclays: We See The Most Value In Europe

European equities offer the most attractive risk reward profile in the near-term according to a European equity market outlook from analysts at Barclays published earlier this week.

US equities have attracted the most attention so far this year, the Barclays equities team led by Keith Parker, opines that US fiscal policy is now the fulcrum for US stocks. With this being the case, it looks as if the S&P 500 will trade with a “fiscal option” through 2017, the value of which will oscillate with market-assessed probabilities and potential plan size.

However, the outlook for European equities is brighter thanks to improving economic growth, low relative valuations, earnings growth and the removal of political risk when the French elections are out of the way:

“Elections in France will likely be a key catalyst for markets, particularly European and euro area equities. We see the political risk premium in euro area equities as offering attractive upside potential on a risk-adjusted basis, given solid data and a turn up in earnings. Outflows from European equities have been massive, and the prospect of investor buying following the French elections could help fuel a notable rally as European risk premia narrow. More specifically, we think European value stocks have the greatest upside potential if euro area interest rates rise, with low vol stocks likely to continue to underperform. Euro area stocks should benefit most (particularly in common currency terms), followed by the rest of continental Europe.”

Value In Europe

The biggest bull case to be made for European equities is the return of earnings growth. After seven years of stagnation, Barclays is forecasting 10% earnings growth in Europe for 2017. Despite this projection, however, valuations, on a relative basis, are still near multi-decade lows and are not pricing in potential earnings growth according to the team. Stocks with positive EPS revisions are the cheapest they have ever been.

Earnings are set to receive a huge boost from inflation and subsequently margin expansion. The team at Barclays expects European inflation to hit 2% in the near-term, driving a near 2% increase in profit margins over the coming years. Conservative forecasts suggest 3% sales growth for 2017 with 50 basis points worth of margin expansion boosting the bottom line by 10%.

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