Looking for value in Europe....

....as CAPE values (Cyclically Adjusted Price Earning ratios over 10 years) are suggesting that European equities are looking cheap. This is certainly the case versus US equities which closed at record highs recently and are trading in potentially expensive territory on the CAPE measure.

Why this matters was explored by Meb Faber in his book Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market. In his current market outlook he is explains that the US is again looking stretched versus Overseas markets, although it did also look stretched last year and and went onto become one of the best performing markets in the last year. So it just goes to show that while these measures may make sense in the medium terms they are not necessarily a guide to shorter term movements.

Meanwhile in Money week this week, there was an interview with the creator of the CAPE valuation indicator, Robert Shiller the professor and author of the book Irrational Exuberance which came out in 1999 and warned about equities, In its second edition it warned about a housing bubble in the mid 2000's. So I was not surprised to hear that the third edition which is just out is and has topically added a look at irrational exuberance in bonds. Now that is off topic for this note, but he did reference in his interview, the difference in CAPE valuations between the US and Europe where they are half the level of the US and also suggested that this might offer opportunities.

So with all the travails in Greece and the showdown / compromise with the EU due maybe there could be some good potential if this gets resolved? Now while Greece along with Russia are, understandably, some of the cheapest markets in the world on CAPE, I'm not suggesting you rush out and buy those markets. Having said that though with a potential ceasefire in Ukraine and the possibility of a deal in Greece maybe they could do well from here if you were brave enough?

A safer way to play the region if you don't want to hunt for individual equities throughout the European region is to buy a more broadly based fund. As I have mentioned in the past, I tend to prefer using Investment Trusts for gaining overseas exposure, so what are the options for gaining exposure to Europe.

Probably the best and one of the larger ones is Jupiter European Opportunites Trust (JEO) which has been managed very successfully by Alex Darwall since November 2000. He has a sizeable personal stake in the fund and takes high conviction position in what he believes are quality Companies. His strategy seems to have paid off over the years as you can see from this analysis. The only down side is that is means it doesn't come cheap (in terms of rating) and often, as now, stands on a premium to NAV and also it offers less than 1% in yield.

If yield is more your thing and you don't mind going down the size scale, then you could revisit a smaller cap. European Investment Trust which I wrote up back in January 2014 as offering a tasty yield. This is the European Assets Trust (EAT) which still offers a yield of 5.7% despite being up by nearly 10% in the last twelve months. This is because this one unusually pays out 6% of its capital each year as a dividend and this rises or falls with the asset value each year. Thus this years dividends, it pays three times a year, are up by 8.5% on last years payments. Its NAV performance has matched that of JEO over the last 3 years but trailed it by around 18% over 5 years, although I guess the extra yield would have made up most of the difference.

Finally, you could consider a more broadly based fund which follows a quantitative approach to selecting European equities with yield. This is called the JP Morgan European Investment Trust - Income shares (JETI) which has been Co-managed by Alexander Fitzalan-Howard since August 2006. It has been a steady rather than spectacular performer lagging JEO & EAT over 3 & 5 years but it has I believe out performed its benchmark and it offers a yield of around 3%.

So there you go three ways to potentially play a recovery in European equities which may be helped by low valuations, QE and perhaps a resolution to the Greek situation at some point in the near future. Of course I'm sure there might be some good open ended companies out there which one could use, so if any readers have any ideas in that space please feel free to add them in the comments section.

Alternatively as I like to try and add value for you, please see the output from a quick screen I did on Quant-investing.com which is simply the 20% of highest yielders across Europe and which starts at 3.7% upwards. So not too bad a yield but I can't say if any of them are good buys, you'll have to do your own research for that so good bye or Αντίο as I believe they say in Greek.

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