Comparing Valuations of Eurozone and US Stocks

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Eurozone stocks are not expensive relative to their US peers based on Cyclically Adjusted Price to Earnings ratio according to an article by John Oliver at AMP Capital, Australia. He discussed four reasons on why Eurozone stocks are attractive at current levels. From the article:

Eurozone shares remain attractive

While question marks remain over Italy and this will weigh on the Euro, there is good reason to be optimistic regarding Eurozone shares. First, Eurozone shares are not expensive. They are trading on a price to forward earnings multiple of 14 times which is around its long-term average. And their cyclically adjusted price to earnings ratio which compares share prices to a ten-year moving average of earnings (often called a Shiller PE) is around 17 times compared to 32 times in the US. This is largely because Eurozone shares underperformed US shares in the post GFC period. Adjusting for relatively lower bond yields in Europe makes Eurozone shares even more attractive.

Source: Global Financial Data, AMP Capital

Second, the European Central Bank is still pumping cash into the economy and is a long way from rate hikes. Italian risk may keep it easier for longer. This contrasts to the Fed which is engaging in quantitative tightening and raising interest rates.

Third, the Euro is now falling. A rise in the Euro through last year – as Eurozone growth surprise on the upside relative to the US and political risk declined in the Eurozone relative to the US – harmed Eurozone shares. This is now reversing as US growth has started to accelerate relative to the Eurozone.

Finally, while Eurozone growth has slowed a bit it’s still good and thanks to ongoing monetary stimulus and a now falling Euro is likely to remain so. In turn this is good for profit growth.

Source: Italy is a worry – but 3 reasons not to be concerned about an Itexit, AMP Capital

Below are three points to remember before jumping into Eurozone equities:

  • US stocks have always commanded a premium relative to European stocks as American firms’ growth potential is usually higher.
  • Though Eurozone stocks are lagging in recent years they have beaten US stocks in the past in some years.
  • Eurozone stocks tend to have higher dividend yields than their American peers but for US investors dividend withholding taxes can take a substantial bite out of the yields.

Share Classes, Currencies and Exchanges of China Stock Market 2018: Chart

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The equity market of China is complex to say the least. Due to capital flow restrictions, there are many different share classes and currencies that they can be traded with. There are seven different types of share classes. A-Shares are allowed for trading only for domestic investors and foreigners are not allowed to own those.

The table below shows the various share classes, currencies and the exchanges they are listed:

Click to enlarge

Source: Chinese Equities: Market Access, Equity Benchmarks & A-Shares, WisdomTree

The Top 10 Cheapest Airlines In The World 2018: Chart

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The world’s cheapest airlines were published earlier this year by the Australian travel site Rome2Rio. According to their study, based on average price per kms in US dollars, the cheapest airlines are in Asia. The ranking was topped by Air Asia, Air India Express and Indonesia Air Asia.

The World’s Cheapest and Most Expensive Airlines are shown in the chart below:

Click to enlarge

Source: Statista

Sadly none of the US airlines are the cheapest in the world.

For the full details including cheapest airlines in the domestic category please visit 2018 Global Flight Price Ranking: What’s the world’s cheapest airline?.

Dividend Returns vs. Capital Returns of Australian Stocks From 1998 To 2017

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The S&P/ASX 200 is the benchmark index of the Australian equity market. However a better benchmark for the overall Australian market is the S&P/ASX 300 index. It contains the S&P/ASX 200 components and 100 smaller companies. This index accounts for 89% of the Australian equity market as of March, 2018.

Capital returns of a stock changes over time and are volatile. However the dividend returns component of total returns of a stock remains stable and provide dependable returns year over year. Capital returns vary based on investor sentiment, overall market conditions, P/E expansions, etc. However dividend payouts are set by a company at a certain level and dividends paid out change based on earnings.

Over the long-term dividends account for a decent portion of overall returns and are stable. Unlike capital return, dividen returns are always positive. The Australian example shows below that dividend returns were positive even during the Global Financial Crisis(GFC) of 2008-09.

The composition of Australian Total Returns fro 1998 to 2017:

Click to enlarge

Source: Lower your volatility with dividends, Australian Dividend Investor

The key takeaway for investors is that total return is important and investors should not just consider stock price appreciation alone when making an equity investment.

Related ETF:

  • iShares MSCI Australia Index Fund (EWA)

You can also check out The Complete List of Australian Stocks Trading on the US markets for potential investment opportunities.

Disclosure: No Positions

Related post:

Should You Buy Australian Bank Stocks Now?

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Australia bank stocks have declined sharply in recent months and are now trading at very attractive levels. For example, Westpac(WBK) has plunged from over $30 a share to about $21. With a P/E of just 12 it has a juicy dividend yield of 6.75%. Other major banks have similar figures. So should investors buy Aussie bank stocks now?

The answer to my question is it depends. For most investors it is best to wait till February of next for clarity before buying into this sector. For those willing to deploy spare cash and have the ability to add more if stock prices fall further and hold for five years of more, then it is time to add some at these levels.

The reason for the sharp decline in the stock prices is not only the rout in commodity prices but also the ongoing investigation into the banks’ lending prices by the The Royal Commission. The Commission is expected to complete its investigation by Feb of next year and release a report. This may lead to legislative changes which is a big uncertainty. As there are multiple uncertainties facing the industry investors have sold off Aussie banks.

From an article in the BBC:

A landmark inquiry into wrongdoing among Australia’s banks and financial services has begun.

The royal commission – the country’s top form of public inquiry – will investigate alleged and established misconduct in the sector.

Australia’s banks, which are among the most profitable in the world, have been accused of customer exploitation and corporate fraud among other scandals.

The inquiry held its first hearing in Melbourne on Monday.

Commissioner Kenneth Hayne said the inquiry would examine misleading and deceptive behaviour in the industry and conduct which fell “below community standards and expectations”.

He said while Australia had “one of the strongest and most stable” financial service sectors in the world, there had been many established examples of misconduct, raising questions about cultural and governance practices.

Source: Australia royal commission inquiry into banking begins, February 2018, BBC

From a Guardian piece on the topic:

Which banks are involved ?
The so-called big four banks – Commonwealth Bank, Westpac, ANZ, National Australia Bank – are being looked at. They comprise four of the five largest companies in Australia by market value, holding an inordinate amount of power over the financial system.

Other companies including AMP, BT Financial, Aussie Home Loans and St George, and a number of small car finance companies will also be called, and more financial institutions will be asked to appear as the year rolls on.

Australia’s seven largest authorised deposit-taking institutions (including the big four) hold roughly $4.6 trillion in assets – around two and a half times the size of Australia’s $1.8 trillion economy, as measured by nominal GDP.

Source:Banking royal commission: all you need to know – so far, The Guardian, April 2018

The Australian Competition and Consumer Commission (ACCC) is also planning to bring criminal carter charges against ANZ bank. More details can be found here.

The four major Aussie banks trading on the US markets are listed below with their current dividend yields:

1.Company: Westpac Banking Corp (WBK)
Current Dividend Yield: 6.75%

2.Company: National Australia Bank Ltd (NABZY)
Current Dividend Yield: 7.42%

3.Company: Australia and New Zealand Banking Group Ltd (ANZBY)
Current Dividend Yield: 8.94%

4.Company:Commonwealth Bank of Australia (CMWAY)
Current Dividend Yield: 6.44%

Note: Dividend yields noted above are as of June 1, 2018. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Investment Perspective:

Aussie banks may take off if the commission’s report to be released in February 2019 is not too damaging. These banks have the ability to withstand severe crises as evidenced by their performance during the global finance and can easily manage the penalties that may be imposed by the state. On the other hand, very serious restrictions on their ability to lend and earn profits may force the banks to cut dividends as their earnings would be adversely affected. But past performance shows that the probability of them cutting dividends is lesser in this scenario. So either way income investors and those willing to bet on a sharp turnaround may want to take bite now. Others can wait and watch as the stocks are unlikely to move drastically either way until the investigation is complete.

It should be noted that for US investors, Australia does not charge dividend withholding taxes.

Disclosure: Long WBK and NABZY

Update(6/3/18):