Few bargains to be found in Europe Is Europe cheap? It ought to be. For at least three years now, prices of securities in the continent have factored in the risk of a disaster that will probably not happen. Begin to factor out that risk, and European stocks should look cheap. Deal activity is returning, suggesting that some smart people think there is value to be had. And Europe has underperformed the US for a while. From the dawn of the credit crisis in 2007 to the worst moments of the eurozone crisis last summer, the US S&P 500 beat the FTSE-Eurofirst 300 by 69 per cent in dollar terms. It has since underperformed by 14 per cent, but it seems natural to think that the "long US-short Europe" trade should unwind further. So much money had flowed into the US as a "haven" during the eurozone crisis years. Unlike the US, cyclically adjusted earnings multiples suggest that Europe is unambiguously cheap, well below its historical average at levels not seen since the early 1980s. This is generally a good indicator of long-term value. But on a shorter view, Europe does not look cheap. It would be tempting to call it a "value trap," only on close inspection it does not seem to offer much value. The price-to-book multiple of the FTSE-Eurofirst 300 index currently stands at 1.6, according to Bloomberg - substantially cheaper than the US S&P 500, at 2.26. But the S&P has been persistently more expensive on this metric, and the gap is no wider than for most of the last decade. This is largely due to differences in sectoral make-up. Tech stocks are 18.3 per cent of the S&P, while technology and media are only 5 per cent of the Eurofirst. This sectoral imbalance also accounts for the gap in dividend yield, another measure on which Europe looks cheap. Europe has more of the type of ex-growth companies that tend to pay out a higher dividend yield, and a different dividend-paying culture. The gap in the cash paid to shareholders is closed by share buybacks, which are more common in the US. Orrin Sharp-Pierson, equity strategist at BNP Paribas, who describes European stocks as "neither cheap, nor cheerful," shows that the cash spent on buybacks and dividends combined comes to much the same yield on either side of the Atlantic. Multiples of free cash flow, arguably the hardest valuation measure for accountants to obfuscate, even suggest that Europe is outright expensive, with a cashflow yield of 4.3 per cent, against 5.3 per cent in the US, he says. Mr Sharp-Pierson also points out that the earnings expectations baked in to European prices look steep. While the consensus is expecting 9.5 per cent earnings growth in the US, they expect 11.3 per cent growth in Europe - even though growth in gross domestic product, under almost any conceivable scenario, will be slower. On a bottom-up view, Europe yields surprisingly few bargains. Andrew Lapthorne, quantitative strategist at Société Générale, screened all the stocks in the FTSE World index for their "Deep Value" - a list of 10 measures first listed four decades ago by Benjamin Graham and James Rea. This looks for stocks that are cheap compared to their fundamentals (with an earnings yield double that of bonds, for example), but also show a "margin of safety," through a strong balance sheet or a history of low volatility. Only 5 per cent of stocks in the eurozone core met his criteria, compared to 3 per cent in the US, and 10 per cent in Asia. Remarkably, no stocks in the eurozone periphery showed up on this screen. Those that passed on value metrics showed up as too risky. It looks like much of the bargain-hunting has been done. All of this is on the market's current assumption that the crisis is over. There is, of course, a real risk that it is not, and that European equities could suffer another politically driven sell-off. Look only at last week's tremors in response to internal political contortions in Spain and Italy. There are political risks elsewhere, but on almost any plausible scenario those risks favour the US. Then there is the issue of the currency. The strengthening euro helps unhedged foreign investors. But it does not help European exporters, and it diminishes the value in euros of their overseas earnings. In recent weeks, gains for the euro tend to have correlated with losses for stocks. A strengthening euro, likely if the crisis continues to dissipate as hoped, would harm the case for European stocks. European stocks have enjoyed a one-off rerating in response to the lifting of existential risks to the eurozone. If the crisis has really been vanquished, those gains can be maintained. But nobody should bank on much more than that. Europe as a whole is no longer cheap.