A common refrain among investors these days is that they will buy into the Eurozone when things are “a bit better”. What they actually mean by that, of course, is they expect things in the Eurozone to get “a bit worse” and, as a result, assets will grow cheaper and then they can buy in.
So, at least, runs the theory – although one general investment observation we would make is that, even if these people are right about the Eurozone situation deteriorating, it does not necessarily follow that assets will grow cheaper. Investors should always look to buy what they see ‘on the screen’ – in other words, weighing up the opportunity as they see it on each individual day.
More specifically, we would wonder if those waiting for the Eurozone to get worse are aware just how bad things already are in a lot of the economies. Recent figures from analysts at J.P. Morgan Cazenove illustrate this starkly. For example, industrial production – effectively a reflection of a country’s output – at its lowest level since 1995 in Portugal, 1990 in Spain and 1987 in Italy.
At the same time, consumer spending has taken a huge step back around the peripheral economies of the Eurozone. Again according to J.P. Morgan Cazenove, retail sales volumes are back to 1998 levels in Portugal and 1997 levels in Spain while, in Italy, they are at their lowest ’since at least 1990’.
That all being the case, where are we in terms of valuations? An important point to make here is that, while people may talk about the Eurozone as a whole, its economies clearly fall into two separate camps. There are those that are doing all right and those that are doing disastrously and, regular visitors to the value perspective will be unsurprised to learn, we are attracted to the latter.
That, of course, is because an investment’s valuation is the biggest driver of whether or not you make money from it. On current Shiller price/earnings ratios – ones that use10-year rolling earnings to smooth out the peaks and troughs of a market – Portugal is trading on 9.8x, which is a 40% discount on the long-term average of 16.4x. That discount is 56% in Spain and 68% in Italy – an extreme low.
So, yes, Italy, Portugal, Spain and others are in a bad state but, ultimately, it is whether or not they are cheap – as opposed to any other factor – that will most determine whether you make money. Some people may be holding out for asset prices to fall further but, in some countries, they are already at their cheapest levels for 25 years. How cheap do they need to be?
Of course they may get cheaper still but, in the end, investment is not a relative game. At some point, in absolute terms, investors have to decide to buy – or not. None of this is to argue you should drop everything and buy Eurozone assets – only that if, for example, you bought Spain or Italy at today’s levels, closed your eyes and held on for 10 years; history suggests you might, on average, do quite well.