CNBC’s Brian Sullivan Interviews Our Experts: Equity Optimism
CNBC’s Brian Sullivan interviewed some of Janus Henderson’s top investment experts in an exclusive live panel on October 9. In the excerpt below, watch Alex Crooke and George Maris make their cases for optimism in Europe and the U.S.
Brian Sullivan: Now the markets have all come up, except for UK, which we can get to as well, slightly bigger than the U.S., make the case why the European equity markets are still a good value despite a better run in most cases than the United States.
Alex Crooke: You invest when fear is greatest and that was sort of two years ago. You remember even a year ago worries about elections and what’s going to happen in France, in Germany, so a lot of those alleviated and so from a political point of view there’s the Brexit, but I think actually those issues are more manageable. And why is it more interesting? Well, first of all, I think you’ve got valuation protection. So you got a European market. So the trading around about 15 times earnings and price to book is not too bad as well, so almost a 25% discount to the U.S. I think another supportive aspect is the banking industry is beginning to head back to health. So you’re beginning to see bank lending increase and again I think the economy responds best when banks are beginning to lend again. And so you’re seeing credit growth around about 2 or 3% and again gradually picking up. We don’t want to see it too excessive because that leads to bubble. So, you know, those are two supportive areas. And I think the third one is to remember the European earnings, you know, so the valuation was paying for those earnings. Actually those earnings are very depressed still, so U.S. earnings against the peak and so this happened in 2006 or 2007 are roughly 20 to 30% above that peak. In Europe, we still see earnings 30%, 20 to 30% below the peak. And so I would argue there’s room for margin to expand here. Now some of those sectors like utilities are never going to come back to their peak earnings or banks, but actually has room for the margin to expand as topline is growing. And we’re seeing this. If you look at the surveys, we’re seeing European investment spending is increasing again, which is supportive, I think, of that margin story and we’re seeing revenue growth as well coming on.
Sullivan: George, you got to now the ability to listen to these three guys and understand their points of view and none of them sound wildly bullish on the U.S. That’s probably where the majority of a lot of the advisors’ clients’ money is. Do you have a different view on the U.S. equity market or are you a little more optimistic because to be fair by any metric we are either at or near peaks of various valuation levels.
George Maris: So there are a couple of different trends here to think about. One clearly, the U.S. has been a strong performing market for the last several years, but if you think about the U.S. economy, over the last 10 years the U.S. economy has grown at 1.27% real. That is the slowest growth rate we’ve had over a 10-year period that includes the Great Depression. The U.S. is now starting to accelerate so you can make an argument that we’re transitioning from this artificial world that Bill talks about into a real world where real economic growth is happening where you’re seeing revenue growth and not necessarily earnings growth that sustained by cost cuts, right? So that’s very helpful. What I think is really interesting now is you’ve got a bifurcated U.S. market. I would argue the really safe stocks, with very low growth, but steady earnings, have seen their multiples just expand dramatically over the last several years, you know, we call them bond proxy for a reason. As bond yields have plummeted, this resilient earnings stream that these companies offer has just gotten much more and more valuable. My view here is that we’re starting to get some inflation creeping back and you saw the hourly wage numbers last week were, you know, a really nice surprise. You start getting inflation coming back in. Those companies have provided you more cyclically oriented inflation adjusted earnings are going to look more interesting. And what’s really cool about that is those were the stocks that are trading at the biggest discount to the market. So you’ve got a tail of two markets in the U.S. You got to really expect you got a really expensive quadrant and you’ve got a really cheap quadrant.
Sullivan: Give us something. What looks cheap?
Maris: So the first set of stocks is, you know, of all things, homebuilders. Homebuilders traded about 10 times forward earnings and you’ve got two to three years of visibility. The competitive environment has never been better. All those sketchy, one-off homebuilders, they’re gone. They can’t get financing. The U.S. has got a housing issue right now because we don’t have enough housing, right? And so that’s a pretty bullish scenario to be buying companies at 10 times earnings. I think you could buy the banks right here. The banks are sitting flushed with capital. You’ve got an environment where you no longer hustle the bank earnings and bank capital and yet they’re all trading at or below book, which indicates that what they’re doing actually destroys value instead of growing it. Meanwhile, they’re issuing dividends and buying back stock at well over their earnings. So that your real returns are tremendous and you’re buying these things at, you know, often times single-digit forward earnings. So to me there is to me real bifurcation and that’s the wrong multiple if we’re not heading into an economic collapse.
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