Chart of the Week - Deep Value

This week: Energy & Materials, US dollar, Macro Sentiment regimes, balance sheet pulse, leading indicators, European equities, EMFX valuations, Gold strategy.

Oct 11, 2022

This email gives you a look at what was in the latest Weekly Insights report

The Weekly Insights Report is part of our entry-level service: summarizing the key points, ideas and charts from our institutional research service.

Chart of the Week - Deep Value in the Eurozone

Deep Trouble, (but) Deep Value: Despite, or perhaps because of, all the bad news and challenges facing Europe — an interesting development has shown up in European equities...

The combined PE ratio (average of the forward PE, trailing PE, and PE10 ratios) has dropped to extreme cheap levels. It is more or less on par with levels seen at the bottom of the dot-com bubble burst bear, and the 2020 c***d calamity crash.

That said, it has yet to plumb the absolute lows seen during the global financial crisis and subsequent European sovereign debt echo-crisis.

So therein lies one of the two cautionaries: although cheap, it could get cheaper.

And it should also be acknowledged that the “E” side of of the PE ratio is a moving target: e.g. if earnings were to fall fast it could make European equity valuations seem a bit less cheap than what they appear now.

But practically speaking, rather than acting on valuation alone, we’d rather see a confluence of factors — a full puzzle picture: e.g. cheap valuations + monetary easing + better leading indicators + signs of alleviation of energy/geopolitical issues, and things of that nature.

So while valuations at these levels do more accurately reflect the risks, it may not be cheap enough yet to compensate for all the bad macro (at least in the near-term — further out it could be a good point to start scaling in, which has historically been the case). Something perhaps non-obvious, something most investors would likely rather avoid, and certainly something to ponder and place on the watch-list.

Key point: European equities are showing up as very cheap.

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Topics covered in the latest Weekly Insights Report

Aside from the chart above, we looked at several other charts, and took a bite out of some really important macro/asset allocation issues right now:

Energy & Materials: Energy and Materials are gaining a second wind.
Macro Sentiment: a look at how macro sentiment impacts on equities.
Global Monetary Policy: implications of balance sheet reduction.
Leading Indicator Check: weighing up Recession Risk.
European Equities: as most say good bye, some say good buy.
EMFX: checking in on valuations and risk outlook.
Gold: update on our gold valuation indicator and next steps.

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Thanks for your interest. Feedback and thoughts welcome.

Sincerely,
Callum Thomas
Head of Research and Founder at Topdown Charts

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