The bad news for Europe keeps piling on: the recent terrorist attacks in Paris, the ongoing immigrant crisis, the continent’s sluggish economic growth and its tepid stock market.
But to one asset manager, there is a bright spot on the horizon: the potential for companies there to grow earnings at twice the rate of U.S. companies in 2016.
Speaking at the Schroders International Media Conference in London last week, Rory Bateman, the company’s head of U.K. and European Equities, said that European companies are positioned to deliver double-digit earnings growth next year, well above the "low single digit" earnings growth he anticipates for U.S. companies.
"The real opportunity for European corporates remains margin expansion, where they are significantly behind the U.S.," he said. "We believe the gap will close, which will provide relative upside for the European stock market."
Because Europe's economic recovery is still in its early stages, the rise in profitability of European companies is just starting to get into gear, he said. European exporters continue to be buoyed by the tailwind of a weaker euro, while lower oil prices have helped boost consumer spending and stimulate domestic consumption.
By contrast, the stronger dollar has put a dent in profits for U.S. exporters. Lower oil prices have slammed energy companies and failed to give the U.S. economy the boost that many had hoped for. And because the United States is in the later stages of its economic recovery, corporate earnings growth here may be harder to come by next year.
Meanwhile, company valuations in the European market are quite attractive, both by historic standards and compared with U.S. numbers. Recently, stocks in the MSCI Europe Index were selling at 14.6 times 12-month forward earnings, well below the 16.9 times earnings for the Standard & Poor's 500 index.
Of course, Schroders’s optimistic outlook for Europe could be skewed by a home turf bias. And the continent faces a number of headwinds, including unanticipated fallout from Federal Reserve rate increases, disappointing growth in China and Europe’s own slow economic growth of around 1.5 percent this year despite European Central Bank efforts to stimulate the economy with near-zero interest rates. The fact that Europe's stocks are selling at such a steep discount compared with those in the U.S. indicates that, for now at least, the majority of investors don't expect a big earnings breakout for the region.
Those subscribing to the emerging Europe story should note that while growth stocks have led the European market this year, value stocks in industries such as financials and materials could outperform in 2016. Bateman pointed out that in terms of valuation, "the difference between value and growth hasn't looked this attractive since 2000."
Martin Skanberg, Schroders’s European Equities Fund manager, added that the valuation chasm between growth and value companies is more pronounced now in Europe than in other parts of the world, with growth companies trading at a 50 percent premium to their value peers.