Investors should avoid allocating to Europe in the hunt for value stocks, as the continent’s energy crisis means the risk-reward is still not there, according to Willem Sels, global CIO at HSBC Private Banking and Wealth Management.
The macroeconomic outlook in Europe is bleak as supply disruptions and the impact of Russia’s war in Ukraine on energy and food prices continue to stifle growth and force central banks to tighten monetary policy aggressively to rein in inflation.
Typically, investors have turned to European markets in search of value stocks — companies that trade at a low price relative to their financial fundamentals — when trying to weather volatility by investing in stocks offering stable longer-term income.
By contrast, the U.S. offers an abundance of big-name growth stocks — companies expected to grow earnings at a faster rate than the industry average.
Although Europe is a cheaper market than the U.S., Sels suggested that the differential between the two in terms of price-to-earnings ratios — companies’ valuations based on their current share price relative to their per-share earnings — does not “compensate for the additional risk that you’re taking.”