By John Wasik
CHICAGO, July 9 Buried in a recent avalanche of
anxiety over the Federal Reserve and U.S. bond and stock
selloffs was continuing good news about European growth.
With euro zone growth expected to return in the second half
of this year, buying opportunities abound after the recent
global stock retreat, according to Standard & Poor's Capital IQ
analyst Robert Quinn. He expects "fragile growth" by the end of
this year as businesses start spending again.
The Continent is still a long way from safe-harbor
territory, but its recovery may be on course. A reliable growth
gauge known as the Markit's Flash Euro Zone Composite Purchasing
Managers' Index rose this month to its highest level since March
2012, topping forecasts. In addition, the United States and the
European Union on Monday began talks on a free-trade agreement
that could boost American and E.U. gross domestic product by
$100 billion annually.
If approved, the free-trade agreement would boost sales and
profits of European companies. The two trading partners
transacted nearly $650 billion in business last year alone.
Even a meager European recovery is positive news for
investors. Unlike the Federal Reserve's recent announcement that
it could begin winding down its bond-buying program as early as
the end of this year, European Central Bank President Mario
Draghi said on June 26 that the ECB's easing program exit is
"distant." That policy may provide an underpinning for European
THE BROAD BET
Although S&P's Quinn sees some sectors turning around faster
than others - he's favoring banks, industrial goods and services
- a well-rounded portfolio featuring large companies could
provide the right kind of exposure for a buy-and-hold investor.
The iShares S&P Europe 350 Index is an
exchange-traded fund that holds European-based global players
like Nestle, HSBC Holdings, Novartis
and BP Plc. The fund is up almost 20 percent
through July 5 compared with about 19 percent for the MSCI EAFE
Index. The fund charges 0.60 percent annually in expenses.
Holding a similar big-stock portfolio is the Vanguard FTSE
Europe ETF, which owns Roche Holding AG,
Royal Dutch Shell Plc and Vodafone Group. The
Vanguard fund invests in a slightly different index than the
iShares ETF and costs less: 0.12 percent annually. It's gained
20 percent over the past year.
Much needs to happen before the "all clear" siren sounds on
Europe. The euro zone needs a centralized way of providing
bailouts to members. Southern Europe is still struggling under
austerity measures and debt loads. Unemployment is still
oppressive in Spain and Greece.
There's also a bumpy road ahead this year for the largest
euro zone countries. Still mired in a mild recession, the
International Monetary Fund (IMF) predicts that France will grow
0.8 percent next year, rebounding from a 0.2 percent contraction
this year. The IMF has cut in half its growth forecast for
Germany this year - to 0.3 percent.
Another wild card is China, which is a big customer of
European exporters. Investors are concerned that the world's
second-largest economy may recede. The People's Bank of China
has taken action to stem a credit crunch and is attempting to
curb growth in the country's "shadow banking" sector.
Downturns or protracted growth in China or the United States
would have a negative impact on Europe in a global economy.
That's why European stocks should be a relatively small part
of your overall stock holdings - less than 10 percent of the
total. While there are plenty of quality stocks from the
continent at reasonable prices, it's still difficult to say when
the darkest clouds will lift.