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By Holly Cook | 10-05-2012 12:00 PM

European Stocks Remain a Better Value Than the U.S.

The overall growth picture looks quite weak, but valuations of European stocks look compelling, says Morningstar OBSR's Peter Toogood.

Holly Cook: From Morningstar, I'm Holly Cook and today we're talking about international investing. I'm joined by Peter Toogood of Morningstar OBSR. Peter, thanks very much for joining me.

Peter Toogood: Hello.

Cook: So why don't we start off with a small question, what is the lay of the land in terms of the U.K. and Europe? What's going on in the macro level?

Toogood: OK, it's still very difficult. I think Europe has still got to deal with its issues in terms of recapitalizing its banks. It means that growth is relatively slow and moribund in half of the region in Europe: if you look at Germany and Sweden, you’d wonder if there’s a crisis; if you look at Italy and Spain, you’d think there’s something else [going on]. So treating it as one mass is problematic--a little like the U.S. and elsewhere: it's region by region.

So the overall growth picture looks quite weak, but there are huge pockets--I mean Germany is the largest economy in Europe, it's got the largest population and up until very recently it's been booming really, and has indeed got full employment. So it's not quite as simple as saying ‘[the outlook] is very poor’, but in aggregate it is difficult. Just taking the U.K. separately--similar issues of debt, more debt and still too much debt. So I’ll repeat the mantra ‘lower for longer in rates, and more than likely lower and longer in terms of growth’.

Cook: So we're coming towards the end of 2012 now, seems like not an awful lot has changed in the last nine to 12 months, but how about looking forward? What's your outlook like for the UK economy and for the eurozone?

Toogood: Well, I think we're in this stop-start process: they stimulate, they get some growth, it fails, they stimulate again, they do some more. You saw the U.K. Q3 numbers of strong growth, slightly a result of Q2 being relatively weak. So again, I think everyone’s looking for a secular trend where the theme is really deleveraging and it continues to be deleveraging. The U.S. is probably the most advanced through that process. If you look at Europe and the U.K., there is still a long way to go, certainly in Europe and one would argue in the U.K. as well. So from a sort of international perspective, outside the U.S., Europe is still fairly moribund.

Asia and the emerging markets are going through a cyclical downturn, this is not secular in their case, we suspect it’s more cyclical than secular. But they happen to be combining at once, which makes the world feel a little bit of a difficult place.

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