Why consider investing in Europe now
This past week saw continued US market volatility as portfolio managers and traders took profits, especially in the tech and biotech sectors, ahead of the start of the new quarter which will begin on Wednesday.
One of the reasons for the volatility in our markets is due to traders trying to determine the overall effect of the strong dollar on this quarter’s earnings, as well as what the Fed raising rates may do. From my point of view, any Fed hike is likely to not have any significantly negative long-term effect. Historically, the stock market has done well during the initial stages of rising rates simply because it means the economy is growing and the demand for money has increased.
Rates will have to get a lot higher before they can compete with stocks…and that’s all around the globe. While our Treasury will today pay you 1.96% for holding your money in a 10 year Note, that’s huge compared with the Europeans. For the same amount of time, the French central bank will pay you 0.51%. The Germans offer 0.21%. If you feel you have too much money, you need to deposit funds with the Swiss. With them, because their note now has a “yield” of minus 0.14%, you have a government guarantee you’ll get back less than you came in with…
On the other hand, I believe European stocks currently look pretty attractive. The Federal Reserve easy money policy helped our markets begin this recovery. It would appear that the same thing is happening now in Europe as a result of the easing by the European Central Bank.
Let’s talk about why that is.
Not the only game in town
Two disclaimers first.
The first is that I heartily agree with a statement from a recent letter that Mr. Buffett wrote to his shareholders in which he stated, “The mother lode of opportunities runs through America. The treasures that have been uncovered up to now are dwarfed by those still untapped.” No change in that forecast.
The other is that it’s been my experience that the natural tendency of investors everywhere is to be more attracted to investments in their domestic markets. Makes sense. They know and use those products and services every day.
My recommendation is that you neither exit the US markets nor do you restrict your investments to only those from our neighborhood, so to speak. To do those things could prove to be expensive. The reason isn’t political – it’s numerical. Of the 7,000-plus actively traded companies with a market capitalization of more than $1 billion – so we’re not talking start-ups here – over 70% are headquartered outside of the US.
Think investing in companies – not countries. If you don’t have an allocation into a more global mix, you can limit your ability to benefit from investing in high-quality companies that are established leaders in many global sectors and industries.
Transition time
International stock markets have been doing very well so far this year. According to Stoxx, its Europe 600 Index, which consists of companies from all 18 European countries, is up over 15% through the 27th. An allocation into the European markets isn’t because the US market is about to fall off the proverbial market ledge. It’s simply because the values over there are now relatively attractive.
Markets don’t trade on good v. bad news. It’s much more a function of how the news about the economy or particular stocks being viewed as better v. worse than expected. Think of it as the stock market’s version of the Theory of Relativity. And, right now, the economic and market conditions in Europe (and other parts of the world) are definitely getting better – relatively and actually. For instance, business activity in the euro zone hit a 46-month high in March, according to data released on Tuesday. Also in March, according to the latest Purchasing Manager Index data, economic growth in the zone continued to improve.
Euro stocks are being helped by improving consumer spending across the continent, with spending growing at its best rate in 10 years. The strong dollar is a major benefit to the large Euro companies and economies. Their products have become more attractively priced in the global markets. Much of what those companies do, and how their economies benefit as a result, is export driven. This means they’re getting better than expected results and shares are rising. That’s all combined to put Euro consumer confidence to an eight year high.
Summary
While the Euro markets are up, I believe they have more to go – especially if you factor in currency differences. If you agree, and you want to allocate some money by using a fund, I suggest you only consider those that have been around for at least 10 years. This way, you can see how they did in good and not as good markets. Consistent results that earn the fund you’re considering a top quintile position respective to others of its exact type over the long-term is another suggested criteria.
One admin point. The markets will be closed on the 3rd in observance of Good Friday. Given the short week, together with the end of/start of a quarter and important economic reports due, don’t be surprised if the Easter Bunny’s hopping doesn’t send more volatility tremors through the market …
Cheers!
Mike
Securities and Investment Advisory Services offered through KMS Financial Services, Inc.
To get an overview of economic conditions, use this link. It’s updated monthly. http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx
Past performance is not indicative of future returns.
Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.
Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
