Join our community of smart investors

Does a value opportunity exist in Europe?

European stocks offer an attractive dividend yield premium but the weak picture for company earnings is cause for concern
March 22, 2016

A sense of trepidation is understandable when investing in small contrarian plays but in the case of European equities, it is argued in some quarters that a value proposition exists relating to some of the world's biggest companies. The question for investors is whether they believe headwinds facing continental stocks have been overstated or not and, if so, do prices reflect an overly pessimistic interpretation?

ETF provider WisdomTree certainly believe that European equity markets present an opportunity. In our video interview, Viktor Nossek (director of research at WisdomTree Europe) explains why, in his view, stocks are cheap. Central to this argument is the attractive dividend yield premium on offer, with the spread between the yield on stocks and local government bonds wider in Europe, than in the US or Japan.

The concern would be that Europe is below trend in terms of real earnings growth cycles. In response, Mr Nossek asserts that by focusing on measures such as the cash-covered dividend, it is possible to screen for quality companies that will maintain payouts.

 

For asset managers, there is a vested interest in encouraging investors to seek out 'undervalued' investments, rather than just cashing out when markets look expensive. The positive correlation between developed equity markets means that European or Japanese stocks are not likely to be any safer than their US counterparts, if the volatility seen at the start of 2016 returns with a vengeance. That said, taking a more nuanced approach to capturing the dividend yield premium could well prove a smart play over the longer term.