As recently as last November, investors believed overseas investing offered the best returns. The US Dollar was viewed very skeptically. Investors suspected that our Government wanted to depreciate the US Dollar so as to put our goods and services on sale for the rest of the world.
Overseas economies were seen as growing faster because the 2008 debacle had its roots in subprime lending, with the epicenter here. Markets overseas were sure to rebound first, and eventually drag our economy out of recession. Overseas central banks were seen as more disciplined; Europe never had to take extraordinary steps, like the "quantitative easing" employed here, so inflation risks were less likely.
Strategists advised that, if you must invest stateside, focus on large multinationals. Big blue chips tend to get a greater percentage of their revenues and business from overseas, offsetting weakness in their US focused business. Similarly investors were advised to avoid smaller US concerns; without much overseas exposure they would be hopelessly tied to the weak US economy and inevitably underperform.
Fast forward six months, and the tune is very different. The talking heads now advise avoiding overseas stocks. Chinese stocks have entered a bear market, falling 21% since November. The Euro has fallen nearly 13% this year alone, and predictions of its declining another 20%, to parity with the US Dollar, are rampant. Greece has narrowly averted debt default following a massive bailout package assembled amid frenzied negotiations by European and IMF policymakers. Meanwhile, rioting in Athens protesting government cutbacks, a precondition to financial assistance, fills the airwaves.
Investors fret that other European countries, including Spain, Portugal, Italy, and Ireland, risk debt defaults. Their record budget deficits, stubbornly high unemployment, sluggish economies, and frightened debt holders are blamed.
Concerns about European political stability abound. Front and center are the clashes between Greek citizens and the military, in a bitter confrontation over the loss of any public largesse. Recent British elections deposed the Prime Minister, leaving a fragile coalition of untested leaders to right the British economic ship. Genuine concerns have been raised as to the durability of the European Economic Union and the Euro currency.
Investors have fled overseas stocks, particularly European ones. An index of European stocks is now down 16% year to date. The real pain has been felt in the so called Club Med countries: Spain is down 34% year to date, Greece 38%, Portugal 31%, and Italy 28%.
Given this political, economic, and investment debacle, are there any European investment opportunities?
In Sum
Despite the problems besetting Europe, we believe solid bargains exist. Valuations are very attractive, with dividend yields in some cases exceeding 10%. Many of the region's blue chips derive much of their business from outside the continent. Euro weakness should pose less of a problem for them. Massive Government assistance will likely jump start recovery, making equity investments more attractive than fixed income.
Valuations Are Very Attractive
European dividend yields are nearly double their stateside counterparts, and other metrics like price to earnings ratios are at a significant discount to US companies. Often, European and American companies are trolling the same markets or are exposed to the same economic forces, making the valuation disparity tough to justify. For example, Exxon and Chevron pursue objectives similar to European oil giants Royal Dutch Shell and Total. The two American companies sport dividends of 2.7% and 3.6%, respectively, while the two Europeans pay out a more generous 6.2% and 6.4%.
It's similar in other industries. Sanofi-Aventis and Glaxo are European based drug behomoths. Following the European stock market selloffs, they boast dividend yields of 5% and 6.7%, respectively, trumping the yields on US counterparts Pfizer (4.3%) and Merck (4.5%).
Many European Companies Have Extensive non European Operations
Europe is a mecca for exporters. Germany is the world's second largest exporter after China, and Europe is the biggest exporting continent. European exports have grown consistently over the last ten years, now nearly $2 trillion, and exceed imports. This gives European companies a valuable hedge against deteriorating economic conditions on their own turf.
The Weakening Euro Provides European Exporters a Critical Edge
The falling Euro adds to the appeal of European exports. The Euro has declined from $1.60 in the summer of 2008 to just $1.24 this year. The decline has accelerated recently, and it's now down 9.3% against the US Dollar in just the last month.
As the Euro drops, European exporters gain an advantage; they can cut their prices overseas, allowing them to take market share. In addition, as European companies repatriate their overseas currencies Euro weakness translates into more Euros, boosting earnings.
US multinationals have enjoyed a tailwind the last few years due to US Dollar weakness. Now, the declining Euro will provide a similar tailwind for European companies, and present a headwind for US companies competing with them.
There's Global Resolve to Prevent European Sovereign Defaults
The recently announced near $1 trillion financial assistance package, now called the European TARP, reflects a resolve to present a Euro block default. The International Monetary Fund joined European states in creating this package. Moreover, our own Federal Reserve extended support by opening up currency swap lines to the Europeans.
Global bankers see Greece and other Euro countries as too big to fail. While that is not politically popular, these bankers see the fallout from any sovereign's default as simply too great. There's no question that this type of policy increases the risk of inflation and moral hazard. It saps incentives to cure the underlying fiscal problems in Greece and other European states. However, that is seen as a problem for another day.
Several Ways to Invest
If you've got the stomach, there are several attractive vehicles to invest in Europe. Certainly, a European mutual fund will provide diversified exposure, with focus on the larger, more internationally oriented blue chips. Consider Fidelity's European Capital Appreciation Fund (FECAX, Financial).
Vanguard's European ETF (VGK, Financial) provides indexed exposure at an economical 0.18% expense ratio. Consider, also, closed end funds, which allow you to buy professionally managed portfolios at a discount. For example, the New Germany Fund (GF) provides exposure to a basket of German and some Dutch companies at a near 14% discount to net asset value; GF has returned about 10% annually over the last five years.
Interesting individual stocks include AstraZeneca (AZN). This London based drug maker is active in 100 countries. It's grown earnings at a near 17% annual clip but also sports a 5.4% yield and a price to earnings ratio in the bottom 20% of the market.
In the telecom sector, consider Telefonica (TEF, Financial). Shunned because of its Spanish base, it actually does most of its business in fast growing Latin America and is the number two player there. It also owns stakes in China Unicom, Portugal Telecom, and Telecom Italia, so it's a virtual mutual fund of telecom players. While you're waiting for better news out of Europe, enjoy the 8.2% dividend and know that you are paying nearly 40% less than you would have late last year.
David G. Dietze, JD, CFA, CFPâ„¢
President and Chief Investment Strategist
Point View Financial Services, Inc.
http://www.ptview.com
Overseas economies were seen as growing faster because the 2008 debacle had its roots in subprime lending, with the epicenter here. Markets overseas were sure to rebound first, and eventually drag our economy out of recession. Overseas central banks were seen as more disciplined; Europe never had to take extraordinary steps, like the "quantitative easing" employed here, so inflation risks were less likely.
Strategists advised that, if you must invest stateside, focus on large multinationals. Big blue chips tend to get a greater percentage of their revenues and business from overseas, offsetting weakness in their US focused business. Similarly investors were advised to avoid smaller US concerns; without much overseas exposure they would be hopelessly tied to the weak US economy and inevitably underperform.
Fast forward six months, and the tune is very different. The talking heads now advise avoiding overseas stocks. Chinese stocks have entered a bear market, falling 21% since November. The Euro has fallen nearly 13% this year alone, and predictions of its declining another 20%, to parity with the US Dollar, are rampant. Greece has narrowly averted debt default following a massive bailout package assembled amid frenzied negotiations by European and IMF policymakers. Meanwhile, rioting in Athens protesting government cutbacks, a precondition to financial assistance, fills the airwaves.
Investors fret that other European countries, including Spain, Portugal, Italy, and Ireland, risk debt defaults. Their record budget deficits, stubbornly high unemployment, sluggish economies, and frightened debt holders are blamed.
Concerns about European political stability abound. Front and center are the clashes between Greek citizens and the military, in a bitter confrontation over the loss of any public largesse. Recent British elections deposed the Prime Minister, leaving a fragile coalition of untested leaders to right the British economic ship. Genuine concerns have been raised as to the durability of the European Economic Union and the Euro currency.
Investors have fled overseas stocks, particularly European ones. An index of European stocks is now down 16% year to date. The real pain has been felt in the so called Club Med countries: Spain is down 34% year to date, Greece 38%, Portugal 31%, and Italy 28%.
Given this political, economic, and investment debacle, are there any European investment opportunities?
In Sum
Despite the problems besetting Europe, we believe solid bargains exist. Valuations are very attractive, with dividend yields in some cases exceeding 10%. Many of the region's blue chips derive much of their business from outside the continent. Euro weakness should pose less of a problem for them. Massive Government assistance will likely jump start recovery, making equity investments more attractive than fixed income.
Valuations Are Very Attractive
European dividend yields are nearly double their stateside counterparts, and other metrics like price to earnings ratios are at a significant discount to US companies. Often, European and American companies are trolling the same markets or are exposed to the same economic forces, making the valuation disparity tough to justify. For example, Exxon and Chevron pursue objectives similar to European oil giants Royal Dutch Shell and Total. The two American companies sport dividends of 2.7% and 3.6%, respectively, while the two Europeans pay out a more generous 6.2% and 6.4%.
It's similar in other industries. Sanofi-Aventis and Glaxo are European based drug behomoths. Following the European stock market selloffs, they boast dividend yields of 5% and 6.7%, respectively, trumping the yields on US counterparts Pfizer (4.3%) and Merck (4.5%).
Many European Companies Have Extensive non European Operations
Europe is a mecca for exporters. Germany is the world's second largest exporter after China, and Europe is the biggest exporting continent. European exports have grown consistently over the last ten years, now nearly $2 trillion, and exceed imports. This gives European companies a valuable hedge against deteriorating economic conditions on their own turf.
The Weakening Euro Provides European Exporters a Critical Edge
The falling Euro adds to the appeal of European exports. The Euro has declined from $1.60 in the summer of 2008 to just $1.24 this year. The decline has accelerated recently, and it's now down 9.3% against the US Dollar in just the last month.
As the Euro drops, European exporters gain an advantage; they can cut their prices overseas, allowing them to take market share. In addition, as European companies repatriate their overseas currencies Euro weakness translates into more Euros, boosting earnings.
US multinationals have enjoyed a tailwind the last few years due to US Dollar weakness. Now, the declining Euro will provide a similar tailwind for European companies, and present a headwind for US companies competing with them.
There's Global Resolve to Prevent European Sovereign Defaults
The recently announced near $1 trillion financial assistance package, now called the European TARP, reflects a resolve to present a Euro block default. The International Monetary Fund joined European states in creating this package. Moreover, our own Federal Reserve extended support by opening up currency swap lines to the Europeans.
Global bankers see Greece and other Euro countries as too big to fail. While that is not politically popular, these bankers see the fallout from any sovereign's default as simply too great. There's no question that this type of policy increases the risk of inflation and moral hazard. It saps incentives to cure the underlying fiscal problems in Greece and other European states. However, that is seen as a problem for another day.
Several Ways to Invest
If you've got the stomach, there are several attractive vehicles to invest in Europe. Certainly, a European mutual fund will provide diversified exposure, with focus on the larger, more internationally oriented blue chips. Consider Fidelity's European Capital Appreciation Fund (FECAX, Financial).
Vanguard's European ETF (VGK, Financial) provides indexed exposure at an economical 0.18% expense ratio. Consider, also, closed end funds, which allow you to buy professionally managed portfolios at a discount. For example, the New Germany Fund (GF) provides exposure to a basket of German and some Dutch companies at a near 14% discount to net asset value; GF has returned about 10% annually over the last five years.
Interesting individual stocks include AstraZeneca (AZN). This London based drug maker is active in 100 countries. It's grown earnings at a near 17% annual clip but also sports a 5.4% yield and a price to earnings ratio in the bottom 20% of the market.
In the telecom sector, consider Telefonica (TEF, Financial). Shunned because of its Spanish base, it actually does most of its business in fast growing Latin America and is the number two player there. It also owns stakes in China Unicom, Portugal Telecom, and Telecom Italia, so it's a virtual mutual fund of telecom players. While you're waiting for better news out of Europe, enjoy the 8.2% dividend and know that you are paying nearly 40% less than you would have late last year.
David G. Dietze, JD, CFA, CFPâ„¢
President and Chief Investment Strategist
Point View Financial Services, Inc.
http://www.ptview.com
