ASMLF - IEUR Has Got That European Discount

• We're at a moment in time when Europe is trading very cheaply again.
• The US markets have been optimistic, and in their typical fashion, the industrial-dominated Europe still worries about recession and inflation.
• Concerns are real, and a discount is a discount: buy Europe.

The iShares Core MSCI Europe ETF ( IEUR ) is a clear representation of European strengths and weaknesses. Compared to core ETFs in the US, it also trades at a substantial discount. This is primarily because it hasn't recovered yet from the latest correction, and we think this is apt given market conditions and remaining uncertainties. Meanwhile, US stocks have made that recovery. The IEUR itself is not a high conviction investment, since it's a very broad bucket of European equities, but it does demonstrate the discount on European shares. Savvy investors should be aware of this and allocate accordingly if looking for value.

The IEUR Breakdown

The holdings list features some of the biggest European names.

Nestle ( OTCPK:NSRGY ) is at the top being Europe's most important brand company. They've got resilience and capacity for pricing , and with a range of brands both premium and discount they are not particularly levered towards a recession. Next is ASML Holding ( ASML ) one of Europe's rare tech leaders , in this case for lithography equipment supplied to fabs. There are concerns around a reversal in semiconductor equipment demand but for the moment supply still appears to be the limiting factor. Roche ( OTCQX:RHHBF ) and other pharma begins to appear quite high on the list, where in the case of Roche topline growth is guided to be maintained despite headwinds from easing COVID-19 testing.

The rest of the IEUR stocks are a bunch of industrial players who have mixed exposures to rising input prices, but on balance seem to be quite stable.

The European Discount

The IEUR is ultimately just a broad bet on Europe, but it demonstrates a quality that we've often found to be the case which is that Europe is always discounted from the US. The iShares Core S&P 500 ETF ( IVV ) is a good benchmark for US market movers, and they trade at an average PE of 20x, while Europe at 13x.

Of course, one reason is the difference in sector breakdowns, where IVV has a lot more tech than Europe, and a lot more of high-growth and highly valued tech where US investors appreciate their tech companies more than Europe. But the peculiar thing is that across strata and even controlling for industry there tends to be a line of conservatism that discounts European stocks consistently from the US. The US has a 20% delta in terms of tech weighting, where tech multiple might average twice that of other stocks' multiples like industrials, but the discount is much larger than 20%. Japan also has a 13x PE, same as Europe. This is another market that generally runs more conservatively. We think it's because retail investors don't engage much with the stock market in either of these geographies. Regardless, investors should pay attention to the fact that for every interesting value idea in the US, there is likely one in Japan or Europe with the exact same factor exposures but just cheaper. This simple strategy is one we've followed for years with success. The IEUR itself would be interesting for any investor looking for diversification and a lower multiple than US tech, which may suffer from latent corporate pessimism to follow consumer pessimism. But our key takeaway is that foreign markets have again become cheaper, with the 17% YTD declines having persisted as opposed to the US where recoveries have been made.

For further details see: