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Value Emerging For European Stocks

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In the midst of an anticipated European economy slowdown, along with the tussle over the terms of UK’s exit from the European Union (EU) in March 2019, the ongoing uncertainties over Italy’s budget deficit woes, and the US-China trade tensions, many investors are questioning where are the value or so-called ‘safe-haven’ equities one can turn to.

Performance of European Stoxx 600 Index

Source: Stockcharts.com (26 October 2018)

The above chart shows the one-year daily chart of the STOXX 600 Index. At the last close on 26 October 2018, the index is firmly in correction territory after falling below the three exponential moving averages (50-, 100-, and 200-day). The relative strength index (RSI) which is one of the measures for momentum fell below the index point of 30 which suggests that most of the components in the index are heavily sold.

Based on the chart above, there appear to be no signs of a rebound, and the index is firmly in the red. There could be further free fall in the index depending on whether European market conditions might start to recover in the coming months. On a year-to-date (YTD) basis, the index recorded a negative 9.7 percent performance. 

Confronting Geopolitical Risks

For European investors monitoring the continent’s markets, one of the major events that took place was the ongoing Italian debt drama which started in May 2018. Politicians tussled over differences in forming a government after Italian President, Segio Mattarella refused to accept the appointment of a new finance minister, Paolo Savona, a fierce critic of the Euro. Mattarella vetoed on the finance minister candidate and the populist government crumbled before taking power.

While those political issues were subsequently resolved by the end of May, Italians are now confronted with another issue in early October 2018 when the ruling coalition government comprising of the Five Stars Movement and the Lega Nord announced their 2019 budget which will raise the deficit by 2.4 percent of the gross domestic product (GDP). The move was opposed by the Euro-zone partners which have been pressuring Italy to decrease its debt.

Credit agencies like S&P Global Ratings have downgraded Italy’s sovereign outlook rating to “negative” from “stable”, but left the credit rating at BBB, two notches above ‘junk’ status.

A second issue is UK’s impending exit from EU in March 2019. Prime Minister Theresa May is trying to gather her party and countrymen to support her plan. However,  many are still divided over the terms.

The PM has also tried to negotiate for a ‘Nordic’ solution where Britain is allowed to exit, but remain within the European Economic Community (EEC). The Prime Minister seeks to lobby for flexibilities in negotiating for trade deals as well, but as an EU member till March 2019, UK has to abide by the rules of not signing separate trade deals with other non-EU nations.

Looking For European Value Stocks

One of the good places to start out is finding the bottom performers in the index and gauge their fundamentals.

Value European

Source: Marketwatch.com (27 October 2018)

Two counters stand out from the list shown above, namely Signify N.V, and Evraz PLC.

Signify N.V.

Signify N.V.is dealing in the provision, development, manufacture and application of lighting products, systems and services. The Netherlands-based company which has a total market capitalisation value of €2.9 billion specialises in Lamps, LEDs (Light Emitting Diodes), Professional Home, and Others. According to estimates provided by Marketwatch.com, the counter is trading at trailing 12-months price-to-earnings (P/E) multiple of 10.5 times. Based on its dividend per share of €1.25, the company offers a dividend yield of around 6.5 percent.



Source: Marketwatch.com (27 October 2018)

The above chart shows a daily one-year interval and has been declining below the major moving averages (50-, 100-, and 200-day). Fundamentally, the company looks relatively cheap and the latest decline in stock prices might be a reflection of the continent’s geopolitical uncertainties.

However, we think that as long as the company is on the right track in achieving consistent earnings performance, the latest decline in the stock price should not be a major issue as long as dividends are paid consistently.

Evraz PLC

Evraz PLC is a UK-listed company focusing in the production and distribution of steel, iron ore, coal mining, and engages in vanadium (a kind of hard grey metal used to make alloy steel) business. Currently, stock of Evraz is trading around £5.03, at an attractive P/E ratio of 5.7 times. Adding another reason to look at the stock is its dividend yield of 12.2 percent.


Source: Marketwatch.com (27 October 2018)

Looking at the one-year daily chart of Evraz PLC, the stock is upward trending but has been seen consolidating £5.00 to £5.50 region.

European equities should not be ignored

As most readers might be comfortable with the home ground due to familiarity among household names like the three local banks, DBS, UOB, and OCBC Bank, one might want to re-examine European equities for potential gems. The two Euro-600 listed counters, Signify N.V. and Evraz PLC are two examples with low relative valuations, sustainable dividend payouts, reasonably good dividend yields, and abilities to cope well with the current market volatilities.

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