According to their price to earnings ratio (PE), European shares - including the UK - are now rated at about a 35% discount to their US peers, almost double the spread between the two regions a year ago. The credit crisis has hit European stocks valuations disproportionately hard as prices have fallen more sharply than elsewhere while earnings expectations have been slower to come back. Stu Schweitzer, global markets strategist at JPMorgan Private Bank, says eurozone growth has outperformed the US over the past two years, creating a sense of complacency in the idea of European outperformance. As German growth has stalled, "in the EU the economic outlook has deteriorated more, relative to expectations, than has been the case in the US, hurting valuations", he said.

A crucial factor has been the reactions of the central banks - while the Fed has cut interest rates aggressively over the past year, the European Central Bank has raised rates resulting in cushioning stock prices and valuations in the US and to boost fears about growth in Europe. Sector weightings also play a role. European indices are heavy on low PE banks and relatively light on technology stocks, with their high growth and high PE ratios. Observers also believe that the housing and financial crises nearer to recovery in the US, while expecting more house price declines, more writedowns and more pain in the financial sector, in Europe. Another factor worth watching are unit labour costs, which are rising in Europe. These are likely to increase inflation, cut into margins and are historically correlated with equity underperformance.