2020 was a wild year in European equity trading
European bourses closed out the year with a whimper, falling across the board:
- UK FTSE 100 -1.45%
- German DAX -0.3%
- French CAC 40 -0.9%
- Italy MIB -0.1%
- Spain IBEX -1.0%
On the year, there was some wide divergence in performance,, with UK stocks posting the worst year since 2008.
- UK FTSE 100 -14.3%
- German DAX +3.5%
- French CAC 40 -7.1%
- Italy MIB -5.4%
- Spain IBEX -15.5%
I envision a reversal in relative fortunes in the year ahead as the rebirth of the service sector boosts Spain and the stronger euro saps German exports. For Spain, the IBEX 35 remains 23% from pre-pandemic levels and 37% from the 2017 high. It would need to double to get back to 2008 levels.
Some of that is a reflection of a narrow index but it doesn't change much of you use broader measures of Spanish stocks.
Drilling down, December was a good month for European stocks but the 3% rise in the euro masks even better underlying demand for European assets.
- UK FTSE 100 +3.1%
- German DAX +3.2%
- French CAC 40 +0.6%
- Italy MIB +0.8%
- Spain IBEX +0.8%
The German DAX hit all-time highs this month and is looking to break out from four years of consolidation:
The main risk to a break higher is the euro but if you're a foreign investor, do you can whether you get a 10% gain from the equity market or the currency?
2021 earnings are tough to forecast but the first quarter of the year is going to be depressed and they're still low. Some of them are trading sub-12 what will likely be 2022 earnings, which is awfully attractive compared to bonds. Here are the 2021 forecast price/earnings ratios:
- UK FTSE 100 14.4
- German DAX 15.6
- French CAC 40 17.9
- Italy MIB 14.2
- Spain IBEX 18.0
Compare those to the S&P 500 at 22 and Nikkei 225 at 21.
Looking through the charts, the FTSE 100 is consolidating after breaking the June high (top of page). I think it will be back at 7500 in short order, which is a tidy 15% rally and I expect sterling to compound that for foreign investors.
I think even better value is if you go down the food chain, the FTSE smallcap index has already retraced all the 2020 losses and finished the year up 4.4%. It could run.
