Monthly Letter July 2014
There is a Swedish saying that a dear child has many names. Switch dear child for Europe and names for problems. Europe has got a knack for ending up with the short s ck when there is a global draw about whose turn it is to face a problem. Part of this is self-in icted as Europe among other things is not a single country and hasn’t got a uni ed legal/tax structure. Part comes from the fact that Europe is very dependent on other regions when it comes to sell- ing goods produced. Sanc ons and trade barriers tend to hit the region harder than the US.
We would argue that those are two of the reasons for the persistent underperformance of the European equity markets. Another is of course that the underperformance vs. the US is highly correlated with the lagging European earnings. The valua on discount is high but it has been at more or less the same level for the last 2 years. You have to go quite some me back to argue that a return to the mean valua on between the US and Europe would yield a good risk adjusted return. The case for Europe over the US is for earnings to recover. Valua on is important, but the trajectory of earnings is even more important.