(The author is a Reuters columnist and the opinions expressed
are his own. For more from John Wasik see link.reuters.com/syk97s)
By John Wasik
CHICAGO, April 28 Although it's easy to get
distracted by the turmoil in Ukraine, the trickle of economic
growth in Western Europe continues to boost euro zone stocks and
batter Russian companies. Multinational Western European stocks
should continue to be core holdings in your portfolio.
Things are looking rosier in the countries clobbered the
hardest by the 2008 credit meltdown. As of April 25, the Italy
FTSE MIB Index is up 13 percent this year, followed by a 12
percent gain in Portugal, almost 8 percent run-up in Ireland, a
5 percent increase in Greece and 4 percent recovery in Spain.
Among the negatives: Unemployment, deflation and tight
credit continue to be problems in these countries, even if they
are gaining ground on repairing their fractured banking systems.
Also, stock markets in The Netherlands and Germany are down
slightly this year (through April 25).
Independent of the Russian turmoil, there are concerns about
deflation in the euro zone and a strong euro. European Central
Bank President Mario Draghi said on April 24 that weaker
inflation could trigger a round of asset buying by the bank. The
rising euro also has the rapt attention of central bankers.
"The euro is too high," former ECB president Jean-Claude
Trichet said on April 23 in Chicago while speaking at the
Chicago Council on Foreign Affairs. Troubled by weak economic
growth in central Europe, Trichet noted "clearly we need to
elevate growth potential through structural reforms."
A strong euro relative to the dollar will make European
exports less attractive and non-euro zone imports to the
continent cheaper. That could hobble the weak recovery there.
Yet if euro zone countries and the ECB can successfully navigate
deflation and re-ignite growth, the picture looks much brighter
for the continent.
To balance the bad and the good, you can pick a low-cost ETF
that focuses on the companies leading the way toward growth and
The Vanguard European Stock Index ETF holds a basket
of leading continental stocks with global operations like Nestle
SA, Roche Holdings AG and Royal Dutch Shell
PLC. The Vanguard fund is up nearly 23 percent for the
past 12 months through April 25 and has gained 2 percent year to
date. The fund charges 0.12 percent in annual management
A similar fund, the iShares MSCI EMU Index, is up 28
percent for the year through April 25 and 2 percent year to
date. Its top three holdings include Total SA, Sanofi
and Bayer AG. It costs 0.50 percent
annually in management expenses.
THE WEAK LINK
Despite the continued hope of a broad-based Western European
recovery, investors need to be aware that the situation between
Russia and Ukraine puts many multi-nationals in Western Europe
in a precarious position. Natural resources are a major concern.
The region imports some 30 percent of its natural gas from
Russia. Tensions particularly impact Germany because of its
heavy reliance on Russian natural gas.
And some European energy companies are intricately involved
- BP PLC owns a stake in Russian state-owned oil company
Rosneft, for example.
Sanctions will also take a bite. The European Union is
considering restricting transactions with Crimean-based banks
and other targeted sanctions. The U.S. announced a new round of
curbs against Russia today. Yet it remains to be seen whether
the European Union will seriously endanger its energy
relationship with Russia through tougher sanctions.
But the real turmoil is in Moscow's stock market. As one of
the "BRIC" countries - along with Brazil, India and China -
spotlighted by investors as a highly coveted developing economy
with high growth, Russia's economic expansion has nearly
Russian debt was downgraded to near-junk status by Standard
and Poor's on Friday and the country's central bank raised
interest rates. Russia's growth may range from 0.5 percent to
zero this year as capital flees the country and the rouble comes
under increasing attack.
Investor money flowing into the leading Russian stock
exchange-traded fund has all but halted. The Market Vectors
Russia ETF holds top Russian companies like Gazprom OAO
, Lukoil Company ADR and Sberbank Rossii OAO
. The fund is down 15 percent for 12 months through
April 25 and off almost 25 percent year to date.
The Market Vector's ETF's performance has been as
challenging and volatile as a Russian winter. After losing 74
percent in 2008, it gained nearly 140 percent and 22 percent in
2009 and 2010. It lost 28 percent in 2011, then gained 15
percent in 2012, and then lost again in 2013 to the tune of
about 1 percent. So far in 2014, it's down 17 percent.
While Russian energy stocks - and investors - will continue
to see heightened volatility, a diplomatic solution could calm
the tumult. In the interim, it's probably best to stay away from
Russian stocks and embrace the larger narrative of recovery in
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Editing by Beth Pinsker and Chizu Nomiyama)