The recent weakness in the European equity market has come from share prices racing ahead of fundamentals, according to BlackRock’s Russ Koesterich.
Mr Koesterich, global chief investment strategist at BlackRock, said European equity markets had fallen by roughly 5 per cent from their June peak.
He claimed that the “market’s recent vulnerability may stem from the fact that the past year’s gains have outpaced earnings growth”.
He pointed out that, even after the recent correction, European equity markets are “still up nearly 20 per cent over the past year”.
He said: “On a price-to-book basis, European equity valuations are up 25 per cent over the past year and 60 per cent from their 2012 lows.
“European stocks are actually still inexpensive relative to the United States, but they are no longer that cheap on an absolute basis.”
Mr Koesterich said this phenomenon of share prices running ahead of company earnings was not confined to European equities alone.
He pointed to US equities, particularly small caps, which have underperformed the wider market so far in 2014 but are still far more expensive because their earnings growth has also been weaker in that period.
