Europe appears to be back in business—and investors may want to grab a piece of it again. After nearly six years of soaring unemployment, crippling government debt and the euro currency on the brink of disaster, there are increasing signs that the continent’s longest recession since World War II is over and that its stock markets are turning around.
That doesn’t mean there won’t be bumps. If it continues, Europe’s recovery will be fragile, and economic growth likely will be weak for years. But similar economic conditions in the US over the past few years still were able to spur a powerful stock rally that has led to record highs and, lately, concerns that US stocks are overvalued. Analysts say many European stocks now are looking like a decent bet—still cheap and considerably less risky as the economic picture brightens.
Bottom Line/Personal asked stock expert Philippe Brugère-Trélat to sort out the opportunities from the dangers…
What a difference a few years can make. At the beginning of 2012, many analysts were warning that the eurozone—the 17 countries that use the euro as their currency—could be on the verge of breaking up. But European Central Bank president Mario Draghi’s dramatic pledge to do “whatever it takes” to preserve the euro, including buying government bonds of troubled countries in unlimited amounts, restored market confidence. The governments of Spain and Italy, which for a while had to offer more than a 7% yield on their 10-year bonds to draw buyers, today pay about 4.5%. European stocks have responded even more vigorously. In the past year, the MSCI stock indexes for Germany, France and Spain are up 26%…for Greece, 47%. And lately, European economies have started to stabilize and even grow a bit. In the second quarter of 2013, the eurozone gross domestic product (GDP) actually grew by 0.3%.
Reality check: Europe’s deeper problems have barely been addressed, and that means that any recovery is likely to be very slow and sluggish. There’s still no mechanism in place that would guarantee that eurozone nations will cooperate on tax policy, spending, bond issuance or other fiscal matters. Unemployment remains high, and bank lending anemic. Policy makers also must be convinced to move beyond austere budget cuts and pass stimulus measures to create more economic growth.
I expect the overall eurozone economy to grow by 1.4% in 2014. Despite this tepid forecast, however, I think the European stock rally will continue as long as three supporting conditions continue—interest rates are kept low by central bankers…China, the eurozone’s largest trading partner, continues to grow its economy respectably…and European companies sustain even modest improvements in earnings. The stocks of many profitable and solid European companies still sell for 50% to 80% below their historic highs—so even modest earnings growth could easily set bargain-seeking investors on fire.
Don’t feel that it’s too late if you missed the rally in European stocks over the past year. That rally has been led by various multinational companies with stocks that had been very cheap mainly because the companies are headquartered in Europe. These include luxury-goods makers and banks. One of the biggest reasons they rallied is that they derive most of their revenues from faster-growing overseas markets. But there are better stock-picking strategies and new leaders beginning to emerge that profit more from a recovering Europe than from economic gains in the US and Asia…
Buy British. The United Kingdom’s GDP is expected to grow 1.7% in 2014, substantially faster than the eurozone, and British housing prices are rising at their fastest pace in seven years. Because the UK has retained its own currency and central bank, investors can gain exposure to European markets without facing the biggest challenges of eurozone politics. My favorite British stocks now…
Kingfisher (KGFHY) is the largest home-improvement retailer in Europe, with more than 1,030 stores in eight countries, including France, Ireland, Poland, Russia and China. Similar to The Home Depot and Lowe’s in the US, which have seen huge stock price gains in recent years, Kingfisher benefits from the housing rebound in the UK. Recent share price: $12.28.
Marks & Spencer Group (MAKSY) is a century-old department store chain with more than 1,100 stores, three-quarters of them in the UK. Its merchandise includes the new Downton Abbey line of soaps and scented candles. Its stock price has increased by 20% this year. Recent share price: $14.60.
Consider stocks of companies that benefit from consumer demand in northern Europe. These companies will benefit from consumer strength in the healthiest parts of Europe, including Germany, whose economy is expected to grow 1.8% in 2014, and Ireland, expected to grow 2.2%. In contrast, the outlook for most of southern Europe is unattractive, although improving. For instance, Spain’s GDP likely will grow just 0.9% next year, and its unemployment rate is nearly 30%.
My favorite northern Europe consumer-oriented stocks now…
Accor SA (ACRFF) is a major European hotel company, with the largest number of hotels in France, where it is based. It is benefiting from rising business travel. Accor has sold off much of its real estate holdings and low-end chains such as Motel 6, which was part of its unsuccessful foray into North America, to concentrate on franchising its more profitable chains, such as Sofitel and Novotel. Recent share price: $39.35.
Metro AG (MTTRY) is the biggest retailer in Germany, with more than 2,200 stores ranging from consumer-electronics chains and department stores to self-service warehouses that sell in bulk to businesses. Its stock is up 41% this year but 53% below its five-year high. Recent share price: $7.71.
Seek bargains among oil and gas giants. Their stocks haven’t had the same run-up as other multinational companies based in Europe because low global inflation and weak economies have restrained energy prices. But these companies should profit from renewed strength in both China and Europe. In the meantime, the stocks offer very attractive dividend yields. My favorite oil and gas giants now…
Royal Dutch Shell PLC (RDS.B), based in the Netherlands, is one of the largest energy companies in the world and one of the leading players in liquid natural gas, especially in China and other countries in Asia. Recent dividend yield: 5.3%. Recent share price: $67.36.
Repsol S.A. (REPYY) is a Madrid-based oil explorer and driller. Spain’s fiscal problems have scared away investors, leaving Repsol’s stock price weak despite its gains following recent major oil and gas discoveries in Alaska and Algeria. Recent dividend yield: 4.7%. Recent share price: $23.36.
