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Italy leads Europe higher; US deadlock drags
This must be agreed before October 17, if the U.S. is to avoid defaulting on its debts. U.S. nonfarm payrolls data will not be released on Friday due to the partial shutdown. Speaking in Washington overnight, Christine Lagarde, managing director of the International Monetary Fund (IMF) said that a failure to raise the debt ceiling before October 17 could hurt the global economy and warned that U.S. economic growth could drop below 2 percent this year. “European equity markets are mixed, having traded in a relatively narrow range with little significant economic or corporate news flow to set direction. Sentiment continues to be affected by the implications of the continuing U.S. government shutdown,” Nomura said in a research note on Friday. U.S. stocks edged higher after a wobbly open Friday, with the Dow clawing back above the psychologically-significant 15000 mark, but the ongoing government shutdown kept investors on edge. The FTSE 100 closed only slightly higher, due to many stocks’ heavy exposure to the U.S.
Europe’s cheap stocks set for a long catch-up rally
After lagging for four of the past five years, value stocks – now touted by JPMorgan, Societe Generale, Nomura and Natixis, among others – have a lot of catching up to do. On a stock price to earnings basis, the gap between value stocks and growth shares is among the widest seen in the past decade, according to Thomson Reuters Datastream. “Finally, you have some areas of the market that are becoming investable again – banks, peripherals. They have massively underperformed for three or four years because of economic activity in Europe, political uncertainty, etc. The catch-up could take a few years,” said Emmanuel Cau, equity strategist at JPMorgan. Top weights in the MSCI Europe Value Index include bank HSBC , and energy giants BP, Royal Dutch Shell and Total. While the STOXX Europe 600 trades at 12.6 times next year’s expected earnings, according to StarMine, HSBC trades at 10.4 times, BP at 7.7 times, with Shell and Total both at 8.2 times. The amount of money invested in European large-cap value equities was 24 billion euros ($32.49 billion) by the end of August, half as much as five years ago, Morningstar data shows. “The common theme is catch-up by lagging assets. That’s a late-cycle theme,” said Christopher Potts, head of economics and strategy at Cheuvreux. “We’re not going to do it in six months. If you’re talking about the recovery of value in Europe, it’s a five-year idea. It took five years to kill that view and it’s going to take years for it to come back.” In 2011, the only other time in the past decade when the price/earnings gap between growth and value was as wide as it is now, the broad market retreat started around three months after that gap began to close.