To buy or not to buy Europe stocks is value hunters’ dilemma

Bloomberg

Europe’s largest money managers are divided on whether to venture near the region’s stocks after the biggest-ever slump made them a steal, going by history.
Amid concern that U.K. secession threatens Europe’s political and economic stability, the Euro Stoxx 50 Index dropped 8.6 percent on Friday, led by a record selloff in bank shares, while volatility jumped. That dragged Euro Stoxx 50 valuations to an almost four-year low versus a gauge of global stocks. The index lost 0.2 percent at 8:53 a.m. in London.
It’s safe to say that after Friday, bulls are no longer expecting asset managers to flood the market with money even after hoarding the biggest cash piles in almost 15 years. While similar selloffs in the past have provided good entry points for the brave, wealth units at UBS Group AG, Lombard Odier, AXA SA and Zurich Insurance Group AG are among those saying this isn’t the time for bargain shopping.
“Sit tight for now is what I’d recommend,” said Caroline Simmons, the London-based deputy head of U.K. investment at UBS Wealth Management, which oversees about 32 billion pounds ($43 billion).
“It will stay really volatile. There are a lot of risks that could come together. This was not the case in the euro crisis, Lehman, or the oil crash — whereas these events had wide financial-market implications, they didn’t have as great a potential to create a longer-term domino effect politically.”
Valuation has been part of the bull thesis on European equities since the financial crisis and, in isolation, Friday’s selloff strengthened that case, particularly through the lens of dividends. The Euro Stoxx 50 has traded with almost twice the payout ratio of the S&P 500 and Friday’s plunge pushed the rate up to 4.4 percent, the highest level in three years.
Banks are also inexpensive relative to recent history. Looking at U.K. lenders, the 21 percent decline in Lloyds Banking Group Plc pushed its price to 0.9 times book value, the lowest since 2013, while Barclays Plc’s 18 percent slump left it at less than half of assets minus liabilities. Overall, banks in the FTSE 350 Index are trading at 0.6 times book, roughly their lowest valuations since the aftermath of the financial crisis in 2009. The multiple for the Euro Stoxx Banks Index has fallen to 0.5 times book, the lowest since 2012.
Besides financial firms, some of the biggest losers in Friday’s selloff were European telecommunications companies, with Telefonica SA and Telecom Italia SpA falling more than 16 percent. Both now trade for less than 0.8 times sales, levels not seen since at least 2014. The full Euro Stoxx 50 fell below 1 times sales after spending most of last year above it, data compiled by Bloomberg show.