Just as the crisis in Europe erupts, out comes a book recommending investing in European stock markets: Invest in Europe Now! Why Europe’s Markets Will Outperform the US in the Coming Years , written by David Kotok (a New Jersey money manager) and Vincenzo Sciarretta (an Italian financial journalist).
The first section looks at long-term macro trends favouring Europe. They include:
The European Central Bank is more focused on controlling inflation and maintaining the value of the currency
Europe is a net exporter
corporate taxes are lower in Europe
European politics is moving to the center-right (most of the top six European countrieshave center-right governments).
One of the main arguments advanced in the book for European stocks is valuation. European price-earnings ratios are currently about 75% to 80% U.S. ratios. By comparison relative price-earnings ratios over the decades have fluctuated between 60% and 130%.
For foreign investors, valuations have only improved as the crisis in Greece weights on the euro. Over the past 12 months, the U.S. and Canadian dollars have gained about 20% more purchasing power over European goods and assets, with over half of the increase coming in the last three months
The second section reviews ETFs tracking European stocks. The Vanguard European ETF provides one of the broadest exposures and lowest annual expenses (0.18%). The iShares MSCI EMU Index Fund covers the 16-member nations of the European Union. The SPDR Dow Jones EURO STOXX 50 tracks the 50 largest companies.
The third and last section contains interviews with gurus who like European stocks. Ken Fisher, chairman and CEO of Fisher Investments, was one. He said he was overweight Europe because it got hammered much worse than the U.S. during last half of the global bear market — and history shows that the hardest-hit sectors go on to outperform over the first two years or so of the ensuing bull market.
Going by the charts in their book, it looks like Kotok and Sciarretta completed their manuscript around the middle of 2009. When asked recently what they thought of the current crisis, they replied that they still hold to their bullishthesis, and indeed, valuations to foreign investors are now even more attractive with the euro down so much.
It remains to be seen, however, whether Europe is entering the point of maximum pessimism where steel-nerved value investors will be rewarded for being be greedy while others are fearful. Many observers have wondered if the countries of Europe are too diverse for a monetary union, so the crisiscouldpotentially intensify.Nevertheless, the situation bears watching; perhaps the outlines of things to come will become a little clearer in the coming weeks ormonths.