Europe Is Cheap, but Not Cheerful: SocGen’s Albert Edwards
Proud and vocal equity bear, Societe Generale's Albert Edwards, is back. And in his latest research note, he once again dismisses U.S. equities as overvalued, while calling for investors to hurry if they wish to find good value European stocks.
Edwards, the chief global strategist for Societe Generale, sent tongues wagging when he declared a "once in a lifetime opportunity" to buy European stocks at the bank's annual strategy conference in London in January. Calling them "unambiguously cheap", he recommended them for long-term investors prepared to hold them for 10 years.
In a note on Thursday afternoon, Edwards reiterated the recommendation, but attempted to dispel rumors he was turning bullish on equities in general.
"I don't and didn't claim any great conversion towards being bullish on equities overall, and you will notice our recommended equity weighting remains a rock bottom 30 percent." he said. "Ours is a global index stance, and that stance is dominated by what we believe is a continued extreme overvaluation in U.S. equities."
If the U.S. is still stuck in the middle of a valuation bear market, it will undoubtedly drag down the entire equity complex, he said.
But despite taking a swipe at equities across the pond, Edwards said that in Europe, 10-year returns at current valuations would probably be favorable.
"Investors are reluctant to invest amid all the ongoing chaos in the euro zone. But the macro backdrop always looks awful when the market is this cheap. There are no such things as toxic assets, only toxic prices," he said.
The key indicator for Edwards is the G&R Deep Value screen, a checklist developed by investor Benjamin Graham and engineer James Rea, which scores stocks out of 10 for both value and riskiness.
Twenty-four percent of stocks from the euro zone periphery pass the value test, wrote Edwards, compared with just six percent of U.S. stocks. However, only 20 percent of peripheral stocks passed the risk factor test, versus 46 percent of U.S. stocks.
"Europe is certainly cheap in a value sense, but it is not cheerful," Edwards said, referring to the comparative riskiness of peripheral stocks.
He added that the window to buy good value European stocks will soon close.
"It is noticeable that the number of stocks passing the value part of the G&R screen has halved in all regions since last June - the height of the euro zone turmoil."
However, he said: "We expect more 'once in a generation' opportunities to buy cheap equities lie ahead – i.e. maybe a thrice in a generation opportunity," he said.