European equities may turn out to be a better investment bet than U.S. stocks thanks to the current valuation gap, Richard Cookson, Global Chief Investment Officer at Citi Private Bank, told CNBC.
“In general terms, Europe is trading on half the valuations of the U.S., so it seems to us that you can’t simultaneously be hugely bearish about Europe and simultaneously that bullish about the U.S.,” Cookson said.
In a note to clients, Cookson wrote that currently the U.S. trades at a cyclically adjusted price-to-earnings (CAPE) ratio of 22, and twice book value, while euro zone equities trade at just above book value and have a CAPE of 12.
“The valuation difference has only been this extreme three times in the last 100 years and by definition therefore Europe has outperformed every single time,” Cookson explains. “Now you might say, well of course we have these systemic concerns, but I’m guessing a couple world wars would count as systemic concerns. So it’s not clear to us that that would be a reason not to go and buy Europe rather than the U.S.”
Cookson believes that the latest U.S. economic data appear better than the economy really is because seasonal adjustments are working in its favor.
He also argues that the U.S. has had the most anaemic recovery since World War II, despite implementing the most loose monetary and fiscal policies ever. Cookson also points out that the US. would not manage to avoid the fallout should larger euro zone economies follow in the path of Greece.
“If the likes of Spain or Italy did blow up — in other words, if you got into this vicious vortex of political economy — the U.S. would not escape that carnage,” Cookson said. “So from our point of view, low valuations, not only providing some downside cushion, they also set you up for better returns later on.”
Citi Private Bank recommends an underweight position in U.S. and emerging market stocks, and overweight in European and Japanese stocks.
In the fixed-income segment, Cookson recommends very long positions in long-dated corporate investment grade bonds. Citi Private Bank is also overweight high-yield bonds, while heavily underweight in government bonds.
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Disclosures:
Disclosure information on individual holdings was not immediately available for Richard Cookson or Citi Private Bank.