Moments ago, during a hearing of Economic and Monetary Affairs of the European Parliament, in his prepared remarks Mario Draghi said that “support from our monetary policy measures is still needed if inflation rates are to converge toward our objective with sufficient confidence and in a sustained manner.” Confirming that no changes to the ECB's monetary policy are due in the near future, Draghi said that "underlying inflation pressures remain very subdued and are expected to pick up only gradually", adding that "risks to the euro area outlook remain tilted to the downside" but "relate mainly to global factors", because the "lack of momentum in underlying inflation reflects largely weak domestic cost pressures" and the "still significant degree of labor market slack and weak productivity developments are weighing down on wage growth."
While he conceded that "acute deflation risks have disappeared and that inflation is set to pick up over the coming years" he remains "prepared to increase the ECB's asset purchase programme in terms of size and/or duration."
In short, his canned dovish statement meant to appease Garman hawks, well mostly Schauble, who over the weekend blamed Draghi himself for the weaker Euro.
What was most interesting however, was Draghi putting on his asset manager hat on - recall that the ECB is the biggest hedge fund in the world, actively managing assets amounting to 37% of the eurozone's GDP - and opining on European asset values, and when discussing the "potential risk of credit or asset bubbles" he said that "currently, we do not see compelling evidence at the euro area level of stretched asset valuations. Both corporate bond spreads and equity prices appear to be broadly in line with fundamentals" (surprisingly, he did at least concede that "the longer the accommodative measures need to be kept in place, the greater the risks of unwarranted side effects on the financial system become").
But is that true? Well, according to SocGen not exactly. This is what the French bank's strategist Andrew Lapthorne said moments ago:
European earnings since the financial crisis have been disappointing, with even happy-clappy pro-forma earnings standing pretty much where the stood six years ago (the current level of EPS was first surpassed in 2005!). Yet despite this awful profit picture European equity prices have risen 30% over the past six years. So why then are so many suggesting Europe is cheap?
Typically when we start looking at valuations, we start breaking down the relative differences across regions and history. We seek to apportion blame to the weakness in say the European Banks sector, or the expense of the FANGS in the US, for creating divergences. This is why we like the simplicity of unweighted valuation measures, as they help strip out many of these differences. We simply ask if the average stock is cheap versus historical norms.
Below we look at price to book by region. What seems clear is that the US is extremely expensive. Yes profitability in the US is higher, but NOT THAT MUCH higher! Europe valuations are mid-range, but profitability remains weak. Indeed a glance at page 11 shows that the 12m forward PE for Europe is only depressed by broad-based double-digit EPS growth expectations for this year, otherwise the 2016 pro-forma PE is a lofty 17x. So Europe, in our view, is not cheap, it is the US that is extremely expensive – and that is probably why most investors are starting to look elsewhere.
Whose opinion is correct? We leave it up to readers, but for now we would go with the guy who prints money to buy any assets he wants, thus goalseeking his own valuation arguments. If and when that changes, and when European inflation starts running so hot the Germans revolt, we would promptly shift over to Lapthorne's view.