by winston » Tue May 27, 2008 4:31 pm
There is a Lyxor Europe ETF 2806 listed in HK
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Cheapest European Stocks Since 2002 to U.S. Slide (Update1)
By Alexis Xydias and Michael Tsang
May 27 (Bloomberg) -- European stocks are the cheapest in at least six years versus U.S. equities, and may only get cheaper as the majority of companies in the region miss earnings estimates.
First-quarter corporate profits in western Europe dropped 25.3 percent, 7.9 percentage points more than at American companies, data compiled by Bloomberg showed, as a U.S. slowdown and a record-high euro eroded overseas earnings. European Central Bank interest rates widened last month to 2.6 percentage points above U.S. borrowing costs when adjusted for inflation, the most since the euro was introduced in 1999, further stifling profits.
``The biggest earnings disappointments have been in euro- land,'' said Franz Wenzel, 50, Paris-based deputy director for investment strategy at AXA Investment Managers, which oversees about $831 billion. ``The U.S. has been at the epicenter of the problems, but the shockwaves are more felt here in the euro zone. Cheap valuations are a direct result.''
The U.K.'s FTSE 100 Index, France's CAC 40 and Germany's DAX are the least expensive indexes of the world's 10 biggest markets by capitalization, with price-earnings ratios ranging between 12.1 and 13.5, Bloomberg data show. Companies in the FTSE 100 this month fetched about half as much as those in the Standard & Poor's 500 Index relative to profits, the widest gap in at least 15 years.
French and German equities trade at discounts of 40 percent or more. Less than two years ago, U.K. and U.S. valuations were about the same, while German stocks were at a premium in 2004.
Valuation Gap
Europe's Dow Jones Stoxx 600 Index, which has fallen 13 percent this year, is valued at 12.7 times earnings, 45 percent less than the S&P 500's ratio of 23. The gap has never been bigger than the 45 percent discount of the last three weeks, according to weekly Bloomberg data dating back to 2002.
The Stoxx 600 today fell 0.2 percent to 317.72 at 9:07 a.m. in London.
With the benchmark for American equities having traded at a four-year high relative to profit this month, only Chinese stocks -- valued at 26.2 times earnings -- are pricier among the world's 10 biggest markets.
For the U.S. and Europe, the gap has widened as 2,014 European companies tracked by Bloomberg through yesterday posted a combined 25.3 percent decline in first-quarter earnings. About 5,375 American companies had a 17.4 percent profit drop, the data showed.
Earnings for seven of 10 industries in Europe have trailed analysts' projections. Overall, 57 percent of the 926 companies with earnings estimates tracked by Bloomberg reported disappointing results. In the U.S., 44 percent of companies have missed consensus forecasts.
`Expecting Too Much'
For the year, analysts estimate profits at Stoxx 600 companies will slip 0.8 percent, the first contraction in six years. At the start of 2008, they predicted 11 percent growth, Bloomberg data show. Estimates for S&P 500 companies have been cut to 6.8 percent growth from 15 percent.
``The U.S. economy is further past the current difficulties,'' said Kilian de Kertanguy, 32, manager at Cholet- Dupont Gestion SA in Paris, which oversees $3.9 billion. ``European earnings are impacted by the U.S. slowdown and analysts are expecting too much.''
Bic SA, the world's biggest maker of disposable pens, fell last month to the lowest in 17 years relative to earnings after posting a 39 percent profit drop. The euro eroded the value of U.S. sales for the Clichy, France-based company, sending its price-earnings ratio down to 8.91.
The euro reached a record $1.6019 on April 22, after climbing 18 percent in the previous 12 months.
BMW Earnings
Bayerische Motoren Werke AG, the world's largest luxury carmaker, trades at 7.6 times profit. The 67 percent discount to S&P 500 companies is the biggest since May 2003. The Munich-based automaker said on April 29 that earnings fell 17 percent as slower U.S. economic growth reduced values for used cars and increased bad debts in the sales-financing unit.
While European companies are being hurt overseas by the U.S. slowdown and the euro's advance, their central banks have also left them at a disadvantage compared with their U.S. rivals.
Bank of England Governor Mervyn King, who reduced interest rates three times since December, said this month that U.K. inflation may exceed the government's 3 percent ceiling for several quarters, signaling cuts may be on hold. The ECB has kept rates steady since last June to tame consumer-price inflation that rose to the highest in almost 16 years in March. Meanwhile, the Federal Reserve slashed rates seven times to 2 percent from 5.25 percent in August.
`Follow the Leader'
``The ECB doesn't want to seem like it's a case of follow the leader or just mimic what the U.S. is doing,'' Laszlo Birinyi, who oversees $350 million as president of Birinyi Associates Inc. in Westport, Connecticut, said in a Bloomberg Television interview.
Adjusting for inflation, the interest rate for the 15-nation euro area climbed to 0.7 percent last month, increasing the real gap with U.S. borrowing costs, which stood at minus 1.9 percent. The 2.6 percentage point difference is the widest since the ECB took over European monetary policy in 1999.
The valuation gap between European and American stocks is too big to pass up, even if the ECB holds off on cutting rates this year, said David Kelly, chief market strategist at JPMorgan Funds, which oversees $304 billion.
`Catches a Cold'
``There is an opportunity in Europe right now,'' Kelly said on Bloomberg Television from Newton, Massachusetts. ``People say when America sneezes, the rest of the world catches a cold. It's the other way around. They are faring better through this turmoil than we will.''
Economic growth for countries in the European Union will reach 1.8 percent this year, according to the Washington-based International Monetary Fund. That's more than triple the 0.5 percent projected growth rate for the U.S.
Still, Sergi Martin, chief executive officer at Credit Andorra's Credi Invest asset-management unit, says his firm is trimming European holdings to buy U.S. shares.
``Certainly stocks are cheaper in Europe,'' said Andorra La Vella, Andorra-based Martin, 36, who oversees $9 billion. ``But there are fears that disappointments in corporate results will be bigger.''
It's all about "how much you made when you were right" & "how little you lost when you were wrong"