Strong return on equity values point to further upside for European stock prices, suggests BCA Research

“Our Global Investment Strategy service argues that European stocks remain attractive because their RoE is substantially higher than the risk-free borrowing rate,” it reports in a research note. “This effectively represents the ‘Excess Return’ of stocks, and has correlated closely with share price behavior.”

“Though the ECB is likely to hike rates further and profit growth is set to decelerate, rising profit margins indicate that excess returns will stay high,” BCA says. “High RoEs relative to the cost of capital, in turn, point to another year of strong merger & acquisition activity, providing additional support for stock prices.”

“We expect European bourses to post solid gains again in 2007,” it concludes.