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European Value against Growth: time to concentrate on the EPS and not the sentiment

By Sharon Bentley-Hamlyn, Founding Partner and Investment Manager at Aubrey Capital Management.

The outperformance of value stocks over growth stocks that we mentioned in our last piece (European Equities – what will 2022 bring?) has continued and with vigour. The relative performance of growth against value stocks in January as measured by MSCI has now been worse than any time since 1970s, which suggests to us that the trade is overplayed now.

Based on consensus earnings forecasts for both value and growth stocks, the following picture emerges.

MSCI Europe Value EPS profit growth will be some 39% in 2022 but this declines sharply to just 0.2% in 2023. Consequently, while the PEG this year is certainly attractive at 0.3x, it balloons (to some 47x) in 2023 as earnings growth evaporates. An Average PEG over the period therefore of 24x.

Compare this with MSCI Europe Growth where consensus EPS Growth is just over 11% both this year and next producing a PEG of 2x and 1.85x in 2022 and 2023 respectively. An Average PEG of 1.9x.

For the MSCI Europe index as a whole consensus forecasts for EPS growth are for 30% and 3% growth for 2022 and 2023 respectively producing PEGs of 0.5x and 4.3x which translates into an average PEG of 2.4x.

The above are consensus forecasts for the three indices. As you know the index means next to nothing in our stock picking process. We are confident that the average profit growth for the stocks in our portfolio will be significantly higher than all of the above indices: 43% in 2022 (1x PEG) and 20% in 2023 (PEG of 1.77x) which produces an average PEG of 1.4x.

The picture is much the same for MSCI World Value vs MSCI World Growth indices.

On the basis of the above, we know where our money will be invested.

Sharon Bentley-Hamlyn | Investment Manager

Sharon is a founding partner of Aubrey Capital Management having joined the firm in 2006. She has been responsible for Aubrey’s European strategy since inception in 2008 and is head of research and lead manager on two Luxembourg quoted European SICAVs, and a UK quoted Europe ex-UK OIEC. She also heads up Aubrey’s Sustainability Committee, which ensures the consistency of ESG scoring across investee companies, monitors UN supported PRI reporting, as well as Aubrey’s own internal ESG performance.

Formerly she was with Walter Scott & Partners from 1992 to 2006, from 2001 as a main Board Director. There she had a global remit following extensive research experience into the major markets of the world: the UK and Europe (including emerging Europe), the USA and Far East. For almost a decade she held primary responsibility for the firm’s European stock selection and for the firm’s regional European assignments, either fully discretionary or with client-specific parameters. Sharon helped develop the firm’s institutional fund management business and managed several publicly quoted SICAVs.


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