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.