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mardi 15 juin 2010

Europe on sale

Despite the gloomy outlook for European state finances and expectations of lower economic growth, Europe appears to be more exciting than it has been for a long time...

Rumour has it that Europe is not competitive and is losing ground to more dynamic economies – such as the USA. According to the World Eco-nomic Forum (WEF), such rumours are baseless. Each year, the WEF measures global competitiveness. These measurements form the basis for a competition index. According to this index, six of the 10 most competitive economies in the world are European.

Europe is competitive
While the USA has been its share of global exports fall from 17 to 11 per cent during the past decade, Europe has managed to maintain its 17 per cent share throughout the period. Of the 100 biggest multinational companies, Europe’s share increased from 57 in 1991 to 61 in 2009. The USA’s share fell from 26 to 19 companies (source: UNCTAD).
A study by consultancy firm Roland Berger shows that of the 3 000 biggest global companies, European companies’ increases in sales and profits were higher than those of both Japanese and American companies over the past decade. From 1998 to 2008, European companies’ profits grew by 13 per cent a year while those of US companies rose by seven per cent. A study by consultancy firm McKinsey also shows that the growth in total per capita value creation since 2000 has been higher in Europe than in the USA (measured as per capita gross domestic product).

Driven by globalisation
The above developments are driven by globalisation. European companies have seen the opportunities before their competitors outside Europe, they have adapted faster and have increased their export share sharply. If we look at Europe as one market, European companies’ export share is 39 per cent. In comparison, the Japanese and American companies’ export share is 30 per cent while it is only 20 per cent for companies in the emerging economies – Brazil, China, Russia and India. Perhaps this is enough to kill the myth that European companies are slow and not very adaptable and that they are losing ground to the “rest of the world”.

Overshadowed by the debt problems
The fact that European companies are driven are actually doing well in an international context is currently being overshadowed by the focus on national debt. This has also affected investor
confidence. A survey by Merrill Lynch shows that Europe is now the region in the world that investors avoid the most. The sharp weakening of the euro has helped to reinforce this – investors have sold European shares due to fears of further falls in the currency.

Discount sales, measured in financial ratios
The national debt problems and low level of confidence are reflected in the pricing of the shares. If we look at the pricing of European shares compared to earnings, European shares are priced at 11.3 times their estimated earnings in 2010 and at 9.5 times their estimated earnings in 2011. American shares are correspondingly priced at 12.4 times their estimated earnings in 2010 and 10.8 times their estimated earnings in 2011. In relation to book values, European shares are priced at 1.4 times their current book values, while American shares are priced at 2.5 times their book values. On top of all this, the European companies are expected to pay an average dividend of 3.9 per cent in 2010 compared to 2.8 per cent by American companies.

According to investment bank Morgan Stanley, European shares have historically been priced at 14.5 times their estimated earnings. Or to put it another way: European companies are currently priced at a 22 per cent discount compared to their historical average.

(extrait de la lettre du mois de juin - Odin - 10/06/10)

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