The fourth quarter of 2018 was tough on investors in European equities, and uncertainty appears to be rising as we enter 2019. But, the Invesco International and Global Growth team believes that environments like these can result in great prices for attractive businesses. In fact, we haven’t seen valuations in Europe this low since 2013. So, what is our outlook for Europe, and where are we finding opportunity?
Uncertainty is the theme for Europe
The MSCI Europe Index declined 13% in the fourth quarter, and European investor sentiment deteriorated — investor survey data from Bank of America Merrill Lynch show the lowest levels of sentiment in Europe that we’ve seen in six years, and near the lowest we’ve seen since 1999.1
As for valuations — in the recent past, stock market valuations were unattractive relative to our team’s criteria, but this is changing. The price-to-earnings ratio for the MSCI Europe Index fell to less than 12x from over 15x at the beginning of 2018.2 We haven’t seen valuations this low since 2013, and on a relative basis, we’re back to record discount valuations for Europe relative to the US.3
What are the main sources of uncertainty for Europe?
- Brexit. The UK is due to leave the European Union on March 29. Parliament recently voted down Prime Minister Theresa May’s Brexit withdrawal plan, but voted to keep her in Downing Street. At the risk of stating the obvious, the situation is highly complex and uncertain. The most important thing is that a smooth execution of Brexit requires a lot of improbable things to go right. A volatile outcome only needs a few likely things to go wrong.
Bottom line: Our UK-based holdings are predominantly multi-national businesses with minimal domestic exposure. Invesco International Growth Fund has less than 4% domestic UK exposure while Invesco European Growth Fund has roughly 12%. We continue to cautiously monitor the situation.