European Stocks Finally Showing Signs of Recovery
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Version 0 of 1. JUST last fall, Europe was sinking into a double-dip recession and many global investors were questioning whether the European Union would even survive. Now signs of recovery have emerged, and European stocks have been ticking higher. Could this be the start of European economic renaissance? A pickup in manufacturing in Italy and Spain, stabilization of manufacturing in France and economic growth in Germany have fed hopes that the worst could be over for the region. More encouragingly, European consumer and business confidence is rising. Confidence indicators hit a two-year high at the end of August and improved again in September. “There are growing signs that the region is pulling out of recession, the longest in its history,” said Chris Williamson, chief economist at Markit, a data and analysis company based in London. “This is the brightest picture we’ve seen for Europe since the Lehman collapse.” Evidence also suggests that investor enthusiasm has been returning. The Sentix investor confidence index, a measure of attitudes toward the European Union, was positive at the start of September for the first time in slightly more than two years as current and six-month expectations improved strongly. In another sign of optimism, Goldman Sachs Asset Management announced that it had doubled its investments in European equities during the summer. And in many eyes, the re-election of Chancellor Angela Merkel of Germany added a note of political stability to the region. “It seems like we’re in a self-fulfilling cycle,” Mr. Williamson said. “There’s a growing feel-good factor about the region, which leads to more money being invested, which leads to more growth prospects and more investment and so on.” This year through September, the MSCI Europe Index returned 16.1 percent, compared with a 19.8 percent total return for the Standard & Poor’s 500-stock index. “We’ve seen U.S. stocks do so well that now investment managers are starting to look around at international equities,” said Karin Anderson, senior fund analyst at Morningstar. “With European funds lagging their U.S. counterparts, it seems like there’s room for gains,” Ms. Anderson said, pointing to a 16.6 percent increase, on average, for traditional European mutual funds through September, compared with 23.8 percent for United States equity funds. Another element may also be working in Europe’s favor. Last year, global investors flocked to stocks in Japan after its new government introduced monetary and fiscal stimulus measures. But as the market rally in Tokyo cooled over the summer, global investors began looking for more profitable investments. “People are starting to think that countries like Germany, and Europe more broadly, may be the next Japan and are poised for an export boom,” said Dave Nadig, president of exchange-traded fund analytics at IndexUniverse. Still, there is reason to be cautious about a European revival, and many specialists urge investors to consider several factors before increasing their exposure to the region. For starters, many mutual funds dedicated to the developed world already allocate a majority of their portfolio to Europe, Ms. Anderson said. “Investors want to be careful they don’t inadvertently double up on Europe,” she said. In addition, mutual funds and exchange-traded funds dedicated to Europe vary widely. Some cover all of Europe except Britain and Switzerland, others might focus only on a particular country such as Ireland and still others may focus on only large- or small-capitalization stocks. About $37 billion is invested in a total of 53 E.T.F.’s dedicated to European equities. Two of the biggest are the Vanguard FTSE Europe E.T.F. and iShares MSCI EMU from BlackRock. In addition, there are many mutual funds dedicated to the region. Two of the largest are Vanguard European Stock Index Fund Investor Shares and Fidelity Europe Capital Appreciation. Experts say inflows to mutual funds and exchange-traded funds focused on Europe have increased slightly in recent weeks. Another consideration is the value of the euro. “When you invest in Europe, you make two bets,” Mr. Nadig said. “One is on the stock market, the other is the currency. It’s important that investors understand the currency bet. We saw a lot of people make a big bet on Japan. They got it right with the stock market up 60 percent. But they left two-thirds of those gains on the table because they didn’t take into account the yen depreciating.” He noted that interest was growing in E.T.F.’s with currency hedging strategies for Europe; one example is the WisdomTree Europe Hedged Equity fund. What’s more, the region’s economic data may be volatile, and the recovery could be uneven. The European economy grew 0.4 percent in the second quarter, but it’s not yet clear whether that was sustained in the third quarter. Economists worry that it will be several years before the region returns to growth of 2 to 3 percent a year. “The road ahead for Europe is not going to be a smooth one,” Ms. Anderson said. “Individual countries have problems and there are many other moving parts with the E.U. itself.” THE region’s problems are still enormous. Political and social tensions remain, and the jobless rate for the euro area was at 12 percent in August. The Greek economy is still contracting, though at a slower rate, and there is talk of a third Greek bailout. Spain, Italy and Portugal are under pressure to cut their budget deficits further. And the region’s banking sector, while strengthening, remains fragile. A strong note of caution about a European revival has come from a powerful economic official, Mario Draghi, the president of the European Central Bank. “I can’t share the enthusiasm,” Mr. Draghi said in August. “These shoots are still very, very green.” But after five years of lurching from one economic and financial crisis to another, that may be all global investors need to bet on Europe again. |