The rally in European equity markets still has scope to run higher, says Peter Oppenheimer, head of European equity research at Goldman Sachs.
“It’s tempting to say the current bull market cannot be sustained, but valuations are attractive compared with other asset classes and the rise in corporate profits and returns on equity look sustainable for at least the next year,” he says.
“The European equity market has risen 150 per cent since the 2003 trough, but is only now reaching its previous peak in 2000 in nominal terms and remains nearly 30 per cent below the peak in real terms. This is despite the fact that profits have risen close to 60 per cent since 2000 and return on equity has more than doubled. Forward price/earnings ratios have fallen from 22 to 13.5 times.
“The market has simply returned to trend growth in real terms, having fallen well below trend after the bubble burst. Investors have not paid for the rise in the RoE to record levels. The implication is that these improvements are cyclical rather than structural.”
But Mr Oppenheimer says there has been a structural boost in world trade relating to globalisation, technological change and the emergence of the BRIC countries [Brazil, Russia, India and China] that is likely to keep profits high.
“Current valuations imply a mean reversion of bond yields upwards and profits downwards, when we believe RoE is likely to remain at relatively high levels,” he says.
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