In Europe, policy makers have been very cautious in raising interest rates, with government rates in the U.K. holding steady at 0.75% and the European Central Bank maintaining a 0% interest since March of 2016. Many market forecasters do not think there will be any rate increases in Europe until late 2019 or even 2020.
Low interest rates help European companies borrow and grow at appealing costs, with the goal of boosting the overall European economy. European unemployment, which historically has been considerably higher than in the U.S., continues to fall, though unlike in the U.S., is still above pre-financial crisis levels.
What could complicate matters in Europe is the success or failure of Brexit – the U.K.’s process of leaving the European Union. With a U.K. Brexit vote set for January, markets are eager to get a sense for how disruptive Brexit will be and if a relatively easy and economically prosperous transition is likely.
While European financial conditions are not as robust as in the U.S., European stocks are priced at a significant discount to U.S. stocks. As the chart below, dividend yields in Europe are higher, and price to earnings and price to sales measures are lower (and cheaper), giving potential upside for holding European stocks, especially if the European economy picks up.
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