Estados Unidos

U.S. companies have historically traded at a premium to their European counterparts because of better underlying 'financials'. To address this issue, we developed the "Fundamental Approach" to determine the relative value of European equities in comparison to the U.S. Our analysis involved regressing the difference in the valuation metrics between the two markets on differences in financial variables, including RoE, operating margins, trailing EPS, forward EPS, sales-per-share, interest coverage, two measures of leverage and cash flow growth. While not as successful as the mechanical approach, the regressions confirmed the conclusion of the mechanical approach. The historical "batting average" of the fundamental valuation indicators are also good. Taken as a whole, our analysis suggests that Eurozone stocks are on the cheap side of fair value versus the U.S. at the moment, but not by enough to justify overweighing the Eurozone based on value alone. One also needs the expectation that European earnings growth will be better than in the U.S. over the next 1-2 years. Indeed, we are more bullish on Eurozone EPS growth than for the U.S. due to ongoing margin pressure in the latter market. For additional details please see Monday's Special Report.

European stocks have lagged the U.S. by a wide margin in the post-Lehman era. The relative EMU/U.S. total return index is close to its lowest level since the late 1970s in local currency terms. It is tempting to take a contrary position, especially since European stocks appear cheap relative to the U.S. on the surface. Nonetheless, European stocks have traditionally traded at a discount, in part because of persistently lower profitability. A Special Report - first published in the Bank Credit Analyst last month - takes a top-down approach to determine whether Eurozone stocks are cheap versus the U.S. after adjusting for persistent differences in underlying profit fundamentals. The report focused on the non-financial sector, and re-weighted the Eurozone equity index using U.S. weights in order to avoid the problem that differing sector weights could bias measures of relative value for the overall market. The report employed both a mechanical approach and a fundamental approach. Seven valuation measures were used, Price/Sales, Price/Forward Earnings, Price/Cash Flow, Price/Book, EV/EBITDA, Price/Trailing Earnings and Shiller P/E. The mechanical approach adjusted the valuation measures by subtracting the 5-year moving average from both markets. We then divided the Valuation Gap (VG) between the U.S. and Eurozone markets by the 5-year moving standard deviation of the VG. In this way, we adjusted for the persistent, but time-varying, gap between the two markets. The result is an indicator that moves roughly between +/- 2 standard deviations. Valuation is not a timing tool, but our analysis of the historical "batting average" shows that all of these valuation metrics except the trailing P/E provide value added as an investment tool. Historically, there was a high probability of a significant excess return to positioning in a contrary fashion between the two markets when relative valuation reached 1 and, especially, 2 standard deviations away from the mean. Currently, all of the mechanical valuation indicators suggest that Eurozone stocks are on the cheap side of fair value relative to the U.S., except for the trailing P/E. However, only two are more than 1 standard deviation away from the mean. We then approached valuation from a fundamental perspective (see next Insight).

Forecast is diverging from strategy for equities. Intermediate-term positives allow for a blowoff to the upside. But we do not expect the rally to have staying power over a 6-12 month horizon.

Informe especial

Eurozone equities have delivered one of the worst stretches of underperformance in more than 25 years. Are European equities a 'buy' versus the U.S., or are they "cheap for a reason"?

Over the past 12 months, the yen surged, powered by global deflationary fears. Japanese monetary conditions massively tightened, causing additional yen strength, creating a vicious circle. Policymakers will respond, but markets are likely to be disappointed. Nonetheless, global factors could temporarily move against the yen. Buy NOK/JPY and AUD/JPY. The BoE will move next month. The BoC will stand pat for the foreseeable future.

The perception that central banks have turned even more dovish has pushed down global bond yields, while also giving stocks a lift. Looking out, bond yields are likely to edge higher as investors begin to focus more on the outcome of easing measures: Higher inflation. As long as yields rise gingerly and in the context of firming economic growth, global equities will remain reasonably well supported. Equity investors should favor the euro area, Japan, and China.

While we are neutral on the broad consumer discretionary index, we remain constructive on the S&P homebuilding sub-group. U.S. bond yields are probing multi-decade lows mostly as a consequence of global deflationary forces and unorthodox monetary policy abroad. This is a welcome assist to the U.S. housing market, as these exogenous factors have pushed down the U.S. 30-year mortgage rate, providing an incentive for consumers to reenter the housing market (bottom panel). A simple homebuilding demand/supply indicator, comprising new home sales expectations versus new home inventories, is steadily climbing. Historically, this gauge has led new home sales prices, and the current message is to expect the latter to reaccelerate. Homebuilder profits have considerable leverage to selling prices, underscoring that a round of positive earnings revisions lies ahead. Bottom Line: Continue to overweight the S&P homebuilding index. The ticker symbols for the stocks in this index are: BLBG: S5HOME - DHI, LEN, PHM.

Signs that the median voter is moving to the left are everywhere. Markets will cheer the move as it means more government spending. In the long term, it depends if policymakers stop at fiscal stimulus. In this <i>Monthly Report</i>, BCA's <i>Geopolitical Strategy</i> reviews prospects for "Bremorse," latest in the U.S. election, Italian political crisis, tensions in South China Sea, and the long-term future of Europe.

With the broad market poking above the top end of its long-term trading range, investors may be on the lookout for sectors and groups that will benefit from improving market sentiment. While the financial sector has been pounded in the last few months and is due for an oversold rebound, we would prefer making more targeted purchases rather than lifting exposure to the whole sector. The consumer finance group warrants bottom fishing. Credit card interest rate spreads have widened in recent weeks, diverging massively from the overall yield curve and signaling that historically cheap relative valuations are not sustainable. Importantly, consumer income expectations have perked up on the back of labor market tightness, suggesting that revolving consumer credit will continue to grow. We reiterate our overweight stance on this group. The ticker symbols for the stocks in this index are: BLBG: S5CFIN - AXP, COF, SYF, DFS, NAVI.

In early-April we boosted our S&P cable & satellite exposure to above benchmark, as cord-cutting has been less destructive than feared and the industry continues to successfully lift subscription rates in a world plagued by deflation. Similarly, in mid-June we lifted the S&P movies & entertainment index to overweight, because value was simply too attractive to ignore amidst signs of fundamental improvement. For instance, the latest ISM services release was comfortably above the boom/bust line, signaling that services-industry demand remains upbeat. That is consistent with solid media pricing power (second panel). Entertainment admissions, cable network and cable TV pricing power are all showing solid gains. The better-than-expected June employment report should soothe any lingering concerns about the sustainability of discretionary outlays on media services, and provide confidence in the durability of pricing power gains. Consequently, good value should ultimately be realized. Bottom Line: We reiterate our recent upgrade to overweight. The ticker symbols for the stocks in this index are: BLBG: S5MOVI - DIS, TWX, FOXA, VIAB, FOX.