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November 25, 2013

Markets May Be Underestimating European Growth Rates

by Sridharan Raman.

In the last few years, Europe has been mired in recession and the region has been cited as a source of weakness for many multinational companies. We take a closer look to see how expected European growth rates stack up versus market expectations.

Over the past 90 days, Emerging Europe and Developed Europe have seen prices increase by 9.3% and 7.9% respectively; only Developed Asia Pacific and North America fared marginally better. So are the markets in the region ready for a turnaround? Based on StarMine analytics, it looks like the region, especially emerging Europe, may be undervalued relative to the expected (analyst forecasted) five-year growth rates.

Source: Datastream/StarMine

Some continued weakness

The softness in the European economy has manifested itself in the form of weak forward five-year growth estimates. These estimates are projected by the StarMine SmartGrowth model that systematically accounts for analyst over-optimism and pessimism. In fact, developed and emerging Europe have the weakest five-year CAGR of all regions across the globe. However, a 6% growth rate for developed Europe is not terrible, considering the global average is just 7.9%.

Emerging Europe on the other hand is the weakest at 3.4%. That growth rate is being dragged down by the Utilities and Energy sectors.

Source: Datastream/StarMine

Analyzing current prices

Let us take a look at the market-implied growth rate across the same regions. We calculate this growth rate by plugging the current market prices into the StarMine Intrinsic Value (IV) model and calculating the growth rate that would justify those prices. In this manner we examine what may be built into the current prices. Surprisingly, global equity markets seem to be discounted relative to the analyst five-year expected growth rates. The global five-year EPS SmartGrowth rate is 7.9%, while the market prices call for a growth rate of only 2.8%.

Source: Datastream/StarMine

Surprising growth potential?

While most regions have a differential between the market-implied growth and the SmartGrowth rate of less than 7%, emerging Europe stands out with a differential of just over 14%. That large differential may mean that those markets are underestimating the growth potential in the coming years. That differential is magnified by the fact that the consensus mean estimate for the whole year has fallen in every region of the world within the last 90 days EXCEPT emerging Europe.

That may be an early indication that growth rates are on the rise in that region, and market expectations are too low. A look at the country level detail shows us that one of the main culprits bringing down the market-implied growth for emerging Europe is Russia, which has a market-implied growth of -13.1%. Look for a rebound in that region if market expectations for growth catch up with analyst expectations. North America is the only region with market expectations and analyst expectations that are comparable.

Watch the video below on how to access and analyze this data via Eikon.

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