This Sunday will witness the first round of voting in a French presidential election, which is likely to determine the future of the entire Eurozone. Belying initial indications, the contest has thrown up two surprise contenders on two extreme ends of the political spectrum. A victory for either candidate threatens to rupture the fabric of the economic union and disrupt the Euro project as a whole.
Conventional wisdom would call for avoiding European stocks completely at this point. But a new survey shows that fund managers have been scooping up more of the region’s stocks as valuations look increasingly attractive compared to their U.S. counterparts. This is why it may be a good idea to ignore political risks and pick up attractively priced European value stocks.
Pen-Melenchon Clash Raises Alarm
During this month, stocks in the Eurozone have declined by nearly 2% due to apprehensions surrounding upcoming French presidential elections. With the first round of voting scheduled for Apr 23, tensions are reaching a fever pitch over the emergence of two new contenders for the presidency. On the one hand, right wing candidate Marine Le Pen has gained in popularity. Among her key campaign promises is a pledge to discard the euro monetary unit, a decision which could threaten the entire currency union.
The other such candidate, left wing leader Jean-Luc Melenchon, wants to go even further. While his promises to increase wages and reduce working hours have caught the attention of the public, he also intends to impose a 100% tax on the rich. In case he wins, Melenchon would also lead France out of organizations such as NATO, IMF and the WTO.
But global fund managers have chosen to ignore such considerations. A recent Bank of America Merrill Lynch survey of global funds managers has revealed that investor enthusiasm toward the Eurozone has actually increased over the last 15 months. Meanwhile, fund managers’ portfolio allocation toward U.S. stocks is now the lowest in nearly 10 years.
Europe Stocks Hold the Valuation Edge
Incidentally, the Trump administration’s inability to push through a key healthcare legislation has heightened political risk on this side of the Atlantic as well. A rally which had built up after Trump’s surprise victory has shown signs of petering out after investors lost confidence in the government’s ability to ring in key changes.
However, the recent surge in stocks has managed to raise stock prices to record levels, leading fund managers to exert caution about their domestic picks. According to the survey, 83% of all fund managers believe that the U.S. market is overvalued, more than any other across the world. This is the highest level experienced in 17 years.
Such sentiments have been pushing fund managers toward European stocks. Meanwhile, expectations of a rebound in corporate earnings have built up, an outcome which is likely to make current valuations appear even more attractive in the future.
An optimistic section of market watchers believe that French election may have a positive outcome after all. This is still a possibility at the moment given that centrist candidate Emmanuel Macron still maintains a slim lead over his rivals.
Picking select European value picks looks like a smart option at this point. An encouraging earnings performance is likely to add to their allure. Our selection is also backed by a good Zacks Value Score and Zacks Rank.
We narrowed down our choices with the help of our new style score system.
Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.
Arkema S.A. (ARKAY - Free Report) is engaged in the manufacturing and marketing of vinyl products, industrial chemicals, and performance products. Arkema is based in Colombes, France.
Arkema holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘A.’ The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 13.18, lower than the industry average of 16.30. It has a PEG ratio of 1.07, lower than the industry average of 1.83. The stock has returned 2.3% over the last six months, underperforming the Zacks Chemical - Diversified Market sector, which has gained 12.8% over the same period. This provides a good opportunity to buy the stock given that there is significant upside potential
RWE Aktiengesellschaft (RWEOY - Free Report) is an Essen, Germany-based company active in the generation and transmission as well as the sale and trading of electricity and gas.
RWE AG holds a Zacks Rank #1 and has a Value Style Score of ‘A.’ The stock has a P/E (F1) of 10.13x, lower than the industry average of 18.74. The stock has returned 7.3% over the last six months, outperforming the Zacks Utility - Electric Power Market sector, which has gained 6% over the same period.
Telefonica S.A. (TEF - Free Report) is a Madrid, Spain-based provider of fixed-line telephone services, wireless communications, Internet access, video and data transmission services.
Telefonica holds a Value Style Score of ‘B.’ It has a P/E (F1) of 13.22x, compared to the industry average of 15.76. It The stock has returned 10.8% over the last six months, outperforming the Zacks Diversified Communication Services Market sector, which has gained 0.3% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Telecom Italia S.p.A. (TI - Free Report) is engaged principally in the communication sector and operates mainly in Europe, the Mediterranean Basin and South America. The company is based in Rome, Italy.
Telecom Italia holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘A.’ The stock has a P/E (F1) of 8.54x, lower than the industry average of 15.76. The stock has returned 0.7% over the last six months, marginally outperforming the Zacks Diversified Communication Services Market sector, which has gained 0.2% over the same period.
VEON Ltd. (VEON - Free Report) is engaged in providing telecommunication and digital services. The company is based in Amsterdam, Netherland.
VEON holds a Zacks Rank #2 and has a Value Style Score of ‘A.’ The stock has a P/E (F1) of 9.97x, lower than the industry average of 15.76. The stock has returned 24.3% over the last six months, outperforming the Zacks Diversified Communication Services Market sector, which has gained 0.3% over the same period.
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