One Trader Is Rethinking European Stocks

Authored by Kevin Muir via The Macro Tourist blog,

It’s tough to get excited about European stocks these days.

Although they had a decent run in 2017, they were still trounced by their American counterparts.

It’s difficult to compete with the Trump tax cut excitement, and let’s face it, a steadily rising Euro is a tough headwind to sail into.

Although there has been all sorts of talk about global synchronized growth, the truth of the matter is that the European economy has been slowly rolling over for the past quarter. Have a look at this chart of the Citibank Eco surprise index of the American economy versus the Eurozone. This indicator measures economic activity versus expectations. As economic numbers are released that beat expectations, the index rises. Conversely, economic numbers that disappoint versus forecasts cause the index to fall.

The American economy started to underperform expectations in late December, but has since stabilized. Not so for the European economy. It has deteriorated at an increasing rate.

But is the US stock market outperformance and the Citibank economic indicator truly representative of what is going on in Europe?

I was stunned by a recent chart created by Bloomberg reporter Ksenia Galouchko that showed the EBITDA trend of the S&P 500 versus the EuroStoxx 600 over the past few years.

As might be expected, the EBITDA margins for Americans companies have vastly outperformed European ones since the Great Financial Crisis. Both countries’ margins slipped in 2009, but the US quickly rebounded while European companies lagged. I have my theories why this might be, but they are controversial. Europe suffered from an unnecessary economic slump that was the result of excessively tight monetary policies and severely restrictive fiscal programs (don’t forget that Trichet raised rates twice in 2011 only having to quickly retract those hikes as the European economy collapsed and don’t get me started about how tightening fiscal policy works in a balance sheet recession). But arguing about proper policy is useless, the real question is what is happening today and what might that mean for markets.

Have a look at this same chart, except this time I expanded the time line and included the ECB Total Balance sheet series.

Interestingly, the EBITDA ratio peaked at exactly the moment the ECB started their quantitative easing program. Don’t forget EBITDA is earnings before interest, taxes, deprecation and amortization. Draghi’s monetary subsidy of cheap funding for corporations should not be leaking into this number. Yet it obviously is…

Let’s put it all together. The Euro currency is overbought, over-owned, and overpriced. It has been holding the European stock market down. Even though the Fed is tapering their balance sheet and raising rates while the ECB is still actively engaged in diametrically opposing policies with stunningly large quantitative easing, the market sees only the worst in the US dollar.

It’s obviously not quite this easy, but there can be no denying the Euro rally explains a fair amount of the recent EuroStoxx under performance.

And let’s imagine that someday the US dollar actually rallies. I know - crazy talk! But it can happen. In fact, it was only a year ago that many investors were falling over themselves in US dollar bullishness due to Trump’s stimulative business-friendly policies. Proving once again that prices make opinions (and not the other way round), now that the US dollar price has been declining, these same investors are almost as equally as confident that it will never rise again. Sheesh.

I know owning European equities is not a sexy trade. And I know all the reasons why Europe is a basket case doomed to fail because of the ill-designed union. And don’t bother emailing me with notes about the huge tax burden and stifling socialistic policies. I know all the arguments. But most importantly, so does the market. In fact, the terrible relative performance of European equities has ensured that most of these points are front and centre in investors’ minds.

Yet, look at that EBITDA trend. European company fundamentals have been improving more quickly than the US. And although many investors are worried about Draghi taking his foot off the monetary accelerator, I don’t see it. Even if he does, he will most likely taper sovereign bond buying and leave the corporate quantitative easing in place. Finally, the recent deterioration of the economic news coming out of the EuroZone has decreased the likelihood of a premature tapering.

So, summing up - European corporate EBITDA is growing, monetary quantitative easing will most likely continue, and when the Euro finally takes a breather, European stocks will be ready to resume their march higher. Don’t listen to all the naysayers. Things in Europe are not nearly as bad as they say.

Which would you rather own? Stocks from a late-cycle economy that is priced for perfection with a Central Bank that is actively tightening policy? Or a maligned stock market, despite improving fundamentals, with a Central Bank that is still actively expanding their balance sheet? You decide.


ExPat2018 Fri, 03/23/2018 - 05:08 Permalink

Unemployment here is about 5 percent. I don't know of anyone losing their home or living off Credit Cards. (NL).

Thats five percent in REAL numbers .  unlike the 25 percent in REAL numbers of the USA.


silverer halcyon Fri, 03/23/2018 - 08:23 Permalink

Interest rate increases will drive the US economy on the rocks faster than a rowboat in a nor'easter. Government debt load on the increased interest will be brutal and unaffordable, and the rest of the planet is getting ready to dump the dollar when China comes online with its yuan for oil system on March 26, backed by physical gold transfer. I wouldn't count on the dollar going up.

In reply to by halcyon

GreatUncle ExPat2018 Fri, 03/23/2018 - 08:52 Permalink

The 25% - 5%, the difference is in some form of benefit / service to keep people off the unemployment register.

Once you remove those services you watch the numbes unemployed rise.

If you really want to measure unemployment you must measure those of working age and not in work.

The whole concept of unemployement is a manipulation of figures to justify manipulation of the economy.

In reply to by ExPat2018

Adolph.H. Fri, 03/23/2018 - 05:08 Permalink

It's difficult to believe because the situation of the American consumer is way more delicate than his European counterpart. 

In other terms, where do these magical  American profits come from? Madison avenue maybe?

You can only squeeze a lemon that much. 

Maestro Maestro Fri, 03/23/2018 - 05:46 Permalink

The bankers are the only people capable of causing a stock market crash.


The BANKERS would be guilty of directly ATTACKING the people and the economies of the world if there is a crash again due to rising interest rates.

BANKERS can create money at will out of thin air.  So there is no excuse for the bankers if they decided to NOT create unlimited amounts of money and buy bonds and stocks with them in order to prevent a crash.

ANY financial crash will be a DIRECT RESULT of the BANKERS' decision to make it so by DELIBERATELY causing said crash through their willful withdrawal of liquidity which they can create at will at essentially NO COST to them.



Manixim Fri, 03/23/2018 - 06:39 Permalink

Not so Sure what underperformance you are talking about? If you compare apples with apples European Total Return Indexes (Accounted for Div reinvestment and so on. In other words apply same methodology to calculate index values as US) they both performed at similar levels. Yes if you just compare Stoxx50 etc than it's a different storry point for point, but they are both using different methodology. That said, I agree: in general situation is a mess and CBers lost a plot sitting on buy triggers. Besides how did the temporary measures designed to stop the bleeding turned into feeding frenzy for those at the elite table thats beyond me. All My views @Thinvalues blog and twitter.

Giant Fri, 03/23/2018 - 08:02 Permalink

EU is a mess. Central bank and private banks are competing who ''prints'' most money and politicians import illiterate inbreds from MENACE(Middle-East, North-Africa, Central-East Asia) countrys to avoid hyper inflation. Time to start playing democracy with inbreds I guess. What could possibly go wrong?

Davidduke2000 Fri, 03/23/2018 - 08:20 Permalink

europe is a collection of vassal states who would not survive without the struggling empire, it even gets worse as the empire lays in ruins the vassal states go with it in the pyramid for the last resting place like when the old pharaohs used to have their wives and slaves with them when they die . 

BanksterMind Fri, 03/23/2018 - 09:14 Permalink

Someone is channeling Maduro...


All the stuff they won't teach at school:   Entrepreneurship for kids.  (age 8 to 88)



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Baron Samedi Sat, 03/24/2018 - 01:55 Permalink

Maybe someone will remind me ... did I miss mention anywhere above that the Euro/other central banks are buying (lots of) equities to maintain the prices - even the nominally sane Swiss?

Seems like what techie designers call 'single points of failure' should there be bumps in the USD/EUR.