Jul 19, 2023 Market Outlook

Opportunities with European bank stocks

Market outlook | Equities

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Europe remains our preferred investmentregion. The valuation discount versus U.S.stocks continues to be high. Particularly with a view to small- to mid-caps, current valuations appear to be cheap. The current price level should be a good entry point.“In our view, European banks appear to be also promising although they have already performed well in the last few months,” portfolio manager Jarrid Klug states. We expect European banks to revise earnings upward, contrary to their U.S. counterparts. “Their returns on equity should be slightly above ten percent for the time being, thus clearly beating the average of the past years,” Klug adds.

Markets still doubt banks’ ability to maintain their profits this high. This is reflected in cheap valuations. Based on earnings expected for 2024, the price to earnings ratio is currently six and thus extremely low. Even if interest rates were falling medium-term, there are no signs of European banks being in danger of troubles similar to those during the long lasting zero-rate phase. And another argument sounds very convincing: banks repaying capital via dividends and equity buybacks. The average dividend yield of the banking sector is meanwhile hovering around eight percent. Additionally, banks have started to repurchase stocks – with regulatory approval – so that the aggregate pay-out yield of some financial institutions is well above ten percent.

Jarrid Klug

Valuation advantage for Europe

Price/earnings ratios based on profits expected in 2024

Source: DWS Investment GmbH, as of July 2023

U.S. equities

Difficult environment: low earnings growth and very high valuations

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  • Currently, we do not see much price potential for the S&P 500, which has already surged above our June 2024 price target of 4,200.
  • Against the background of our forecast of single-digit EPS growth, a price to earnings ratio of slightly above 20 appears to be rather ambitious. And the probability of still further rising 10-year Treasury yields puts equities under further pressure.


 

German Equities

German economy with signs of slowing – moderate price potential

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  • The German economy is losing steam. For the second time in a row, the business climate index ifo has declined – much more than expected. Particularly the business expectations of corporations have sharply deteriorated.
  • The German Dax has already shown weaknesses recently. We currently see only moderate price potential for the German leading index.

Equities Europe

Good prospects for European equities unchanged

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  • Value stocks from Europe have fallen short of the price gains of U.S. tech stocks, which are fuelled by the euphoria surrounding Artificial Intelligence.
  • The valuation gap might well normalize again, to the benefit of European equities.
  • The expected dynamics of earnings for Stoxx 600 titles for 2024 currently looks more promising than forecasts for the S&P 500.

Equities Emerging Markets

Sluggish recovery in China – double-digit earnings growth expected in the medium term

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  • Latin American emerging markets have had a good run year-to-date, by far outperforming their Asian counterparts which have not yet met the high expectations.
  • One essential reason for the comparably poor performance of Asian equities is the surprisingly sluggish recovery of China after the pandemic.
  • Many investors striving to participate in the growth opportunities of Asia have recently shifted their focus from China to India. In the medium to longer term, we, however, do expect double-digit growth of earnings per share for China.



Legend

The strategic view by July 2024

The indicators signal whether DWS expects the asset class in question to develop upwards, sideways or downwards. They indicate both the short-term and the long-term expected earnings potential for investors.

Source: DWS Investment GmbH; CIO Office, as of 10 July 2023

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  • Positive return potential
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  • Potential profits but also risk of loss rather limited

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  • Negative return potential

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