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European equities looking cheap as recession eases

Monday, 12 Aug 2013 | 7:38 AM ET
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An expected improvement in the euro zone's fortunes could mean now is a good time to get into European equities, with the asset class attractively priced.

Analysts are expecting official figures this week to show the euro zone economy will grow for the first time since 2011. The last time the euro zone climbed out of recession was in October 2009, when the price-to-book ratio for the pan-European Euro Stoxx 50 Index was at 1.5 percent.

Today that same ratio is at 1.29 percent, with a lower ratio meaning the stock market could be undervalued. The average price-to book ratio - which is used to compare a stock's value to its book value - for the S&P 500 is currently at 2.42 percent. The Nikkei's is currently at 1.7 percent. The price-to-earnings ratio for the Euro Stoxx 50 is also currently below those major indexes.

(Read More: European Equities Have 'Rarely Been So Appealing')

JPMorgan maintained its overweight view on European equities on Monday, relative to emerging markets. Wage cost gaps between the core and periphery in Europe are shrinking, the bank's research team said in a note, adding that the periphery's current account deficit has virtually disappeared with measures for the European Central Bank further stabilizing financial markets.

European equities are comparatively cheap
Michael Kurtz, Global Head of Equity Strategy at Nomura tells CNBC's Cash Flow why he likes European equities at the moment.

"We note that this does not mean that Europe will become an economic locomotive, as supply-side economics and macro stimulus are sorely missing," it said, but added that on the whole, with a continued absence of a funding crisis, relative value and client flows will drive performance in European stocks.

Chris Beauchamp, a markets strategist at IG told CNBC that there is reason to be "cautiously optimistic" on Europe broadly with this general pickup in economic data. However, he warned there is still much to be concerned about given the persistence of the euro zone crisis.

"The future for European companies lies in expanding their horizons beyond the continent itself, and if they can do this the low valuations will look hard to sustain," he told CNBC.

(Read More: Time to Switch Into European Equities?)

European equities this year have experienced a modest rally. The U.K.'s FTSE 100 is up 11.6 percent year-to-date, the German DAX up 9.54 percent and the Euro Stoxx 50 higher by 7.2 percent. Barnaby Martin, credit strategist at BofA Merrill Lynch told CNBC that part of this rally has been due to light positioning in equities. When that positioning catches up, with retail investors moving back into stocks, it will lead to a "significant appreciation" in European equity prices.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81

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