Well, so much for a quick fix. German Finance Minister Wolfgang Schaeuble ruled out a “definitive solution” to the ongoing Eurozone sovereign debt crisis at the coming weekend summit, prompting a sharp selloff in global stock markets. And adding an additional wet blanket to the fire of hope, the head of France’s central bank said that the European Central Bank’s bond-buying program would not be expanded. The ECB’s bond buying program had previously been one of the few coherent policy decisions coming out of Europe and a critical part of the effort to avoid crisis contagion spreading to Spain and Italy. So much for that.
Nero: The man was 1,947 years ahead of his time.
Like Nero two millennia ago, it appears that Europe’s modern-day Caesars are content to fiddle while Rome—and every other European capital—burns. And until these little Neros stop acting like pandering politicians and start acting like real leaders, the capital markets promise to be volatile.
Still, despite the muddle coming out of European capitals, something resembling a consensus is starting to take form. Greece is insolvent and will default (see “Three Greek Stocks to Consider After the Default”). The focus has shifted from propping up Greece to managing the fallout on Europe’s banks after the inevitable default happens. If done correctly and in such a way that inspires market confidence, the damage will be contained. If done poorly and without adequate resources…well, say hello again to a post-Lehman 2008 meltdown.
All of their recent actions (and inactions) notwithstanding, I do not believe that Europe’s leaders are stupid enough to allow a disorderly meltdown. But until there is a definitive solution—what British Prime Minister David Cameron has called a “big bazooka”—expect the markets to be volatile, both to the upside and downside.
Hang in there, dear investor. Volatility is not something investors should automatically run from. If you play your cards right, you can do quite well during times of volatility. Investing legend Warrant Buffett made some of his most profitable investments in decades during the 2008 meltdown, and plenty of other value investors did quite well. During a bear market or panic, good stocks go on sale. And when they do, you have to trust your analysis, ignore your emotions and the panicked noise around you, and buy with both fists.
European stocks are trading near their lowest valuations in decades, and there are fantastic long-term buys to be found today. Spanish stocks trade at just 7.5 times earnings, and German stocks for less than 10. By comparison, at 13 times earnings, U.S. stocks would seem downright expensive.
Investors should use any sharp selloffs as an opportunity to buy the dips. For those wanting an easy “one stop shop” option for investing in Europe, the following ETFs deserve a good look:
iShares S&P Europe Index Fund (IEV)— This ETF is not a pure play on the Eurozone, per se. It has a 35.1 percent allocation to the United Kingdom and another 13.3 percent allocation to Switzerland, which use the pound sterling and the franc, respectively. Considering the high correlations these days between the markets of Eurozone and non-Eurozone states, I don’t consider this a problem.
The ETF has a rather high 18 percent allocation to financials, but is otherwise well diversified across sectors. Its largest holdings are Nestlé (NSRGY), Novartis (NYSE:NVS), HSBC (HBC)and Vodafone (NASDAQ:VOD).
The ETS trades at a trailing P/E ratio of just 9 and a dividend yield of 3.55 percent .
PowerShares International Dividend Achievers (PID)—This ETF is my preferred way to play a rebound in Europe. It’s not a pure play on the Eurozone—or even on the European continent, as it has exposure to Canada, East Asia, and even Israel—but it is an ETF loaded with survivors. To be included in this ETF, a company has to have raised its dividend for a minimum of five consecutive years. That means that any company on this list survived the 2008 meltdown and actually managed to raise its dividend under those conditions.
Like any traded security, there is always the risk that the value of your investment can fall in the short term. But given the quality and durability of this ETF’s holdings—and given that it trades for just 12 times earnings and pays a dividend yield of nearly 4 percent—your risk of long-term loss would seem almost nil. PID has a large allocation to the telecom sector, which happens to be my favorite industrial sector at current prices, and counts among its holdings Sizemore Investment Letter favorites Telefónica (NYSE:TEF), Unilever (NYSE:UL), and Diageo (NYSE:DEO).
ProShares Ultra MSCI Europe (UPV)—This ETF is not for the faint of heart. It is a leveraged fund designed to offer 200% of the daily return of the MSCI Europe index. On days when it appears the world is not ending, this fund flies. But on days when risk aversion creeps back into the picture, the bottom falls out. On the day of Mr. Schaeuble’s comments, the ETF dropped 6 percent.
Still, investors wanting to place an aggressive bet on a recovery in Europe might find that this ETF is exactly what they’re looking for. Just make sure you stock up on antacids ahead of time.
About the author:
Mr. Sizemore has been a repeat guest on Fox Business News, quoted in Barron’s Magazine and the Wall Street Journal, and published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures and Options Magazine, and The Daily Reckoning.