The European Value Premium

The ongoing euro currency crisis has led to substantial declines in European asset prices. Measured relative to operating cash flow, European corporate assets are now selling at a 30% discount to the average of the rest of the world. While some portion of this differential can be explained by a weaker macroeconomic outlook, most of it is attributable to an increase in expected returns. Even if one assumes near-zero real earnings growth, the expected returns on European corporate assets exceed those available elsewhere in the world over an assumed five-year holding period.