Is Now The Right Time To Invest In
Europe?
In 2012 European Central Bank
president Mario Draghi promised "to do whatever it takes" to maintain
the Euro. The actions taken by the European Central Bank to shore up failing
banks in troubled European economies appears to have born fruit. For the first
time since 2011 the European Union is showing positive economic growth. This
has attracted a large amounts of capital to region betting that the European
economy may finally be recovering.
European Stocks Are Relatively
Inexpensive According To Earnings
According to Citibank the typical
European large cap stock has a price / ratio of about 12. That compares to
about 18.4 for the S&P 500. In the past P/E ratios for the two economies
have been relatively close, so the wide gap is interesting to note. It reflects
concerns about the economic prospects and the stability of the Euro. But, it
could also signal that Europe has not reached the same stage of recovery as the
American economy. That may mean that European stocks represent a bargain
opportunity to buy.
Another factor to consider is that
many European companies are conducting much of their business abroad. This
means that they may be being unfairly valued simply because their headquarters
is located in Europe. European companies with a strong export focus and
operations in Asia and the Americas may be a good investment even if the
nascent economic recovery in Europe stalls.
GDP Growth On The Rise Once Again |
European Central Bank
In the second quarter of 2011 GDP in
the Eurozone started to grow for the first time since 2011. GDP growth for the
quarter was 0.3%. Even the troubled economy of Portugal posted growth rates of
1.1%. Not all of the news was good however. Struggling economies such as Spain,
Greece and Italy contracted, though by less than in the first quarter of the
year. In Germany average wages recently increased by 5-6%. Those are
significant gains which should translate to improved consumer spending in the
region. Even Spain showed some signs of improvement. In the second quarter
Spain saw a rise of 6% in exports.
The Success Of The Bailouts
Much of the credit for the economic
recovery is being attributed to the bailouts. European authorities and banks
have pledged that they will provide whatever funds are necessary to support
struggling economy's banks. They have also bought government bonds of those
countries to prevent complete financial free fall. Because this strategy is
seen as being successful it is starting to improve confidence in the region.
Europe Looks Unlikely To Split
Germany and other leading European
counties seem committed to maintaining the union. It is worth noting that
Europe does not face another major political election until 2017. This suggests
that there may be no significant political surprises for the next few years.
That stability could help the larger nations in Europe to shore up the
financial stability of the region.
Consider Financial Stocks
Financial stocks are often an
excellent way to invest in a growing economy. Increased consumer and business
lending has driven financial stocks in Europe higher and this trend is expected
to continue next year. UK bank Loyd's has outperformed the S&P 500 this
year, and financial company's like Credit Suisse and UBS have also done very
well.
Risks And Potential Rewards |
European Central Bank
While Europe has a whole seems to be
showing definite signs of recovering there are some serious problems that
investors need to be aware of before investing in the region. The unemployment
rate in Spain stands at an astounding 26.9%, Greece is similarly high at 26.8%.
These are signs of massive structural economic problems which won't be resolved
simply with bank bailouts.
Even ECB Mario Draghi has described
the recovery as "weak, fragile, as uneven". The ECB cites a number of
different reasons why they may need to consider cutting interest rates
including a strong Euro exchange rate, low inflation and weak lending to
households and businesses. These threats have led the ECB to keep interest
rates at a low of 0.5%.
Overall thought the risks in the
economy are well known and attempts are being made to deal with them. With P/E
ratios for stocks at around 12 much of this risk appears to be already priced
in. The European Central Bank seems determined to continue its accommodating
monetary policy which should help businesses in the region. This makes Europe
appear similar to the economic situation in America in 2011. Europe may just be
the next big investment opportunity.
