Amid all the doom and gloom surrounding Europe these days, one positive outcome of the sovereign debt crisis is that it has forced eurozone member states into discussions that should result in a tighter fiscal union. I believe a monetary union is simply not sustainable without a fiscal union (or at least a cohesive fiscal policy).
The current combination of no or low economic growth and the austerity measures (which may exacerbate this no-/low-growth environment) is also forcing a serious look at structural policies that have made Europe less competitive: labour mobility, union issues, etc. If we want to see a stronger and more competitive Europe going forward, these are the kind of steps that simply must be taken. In fact, the issues they are now tackling likely would have been have been ignored without the crisis to spur a desire for change.
What does all this mean for investors? The overall macroeconomic environment has led to a significant de-rating of the European market. This can be seen in the widening discount of the relative P/E ratio of European stocks versus North American stocks. The recent underperformance has resulted in the European market becoming significantly cheaper than those of Canada and the United States.
All things being equal, we believe these cheaper valuations should bode well for European returns over the coming years.
Read the Trimark Global Fundamental Equity Fund 2011 year-end review for more on global equity markets.