Eurozone Recession Over, They Say; Time to Consider Investing There?
By John Whitefoot for Daily Gains Letter |
No matter what the overarching economics are in the U.S., the fact of the matter is that you really can’t beat the Federal Reserve.
Sure, unemployment and underemployment are high, consumer confidence is down, personal debt is high, and housing prices are still 25% below their 2006 highs, but with the Federal Reserve dumping $85.0 billion per month into the markets and keeping interest rates artificially low, the markets can’t help but rejoice. And until those two dynamics change, the markets will continue to rally, with the odd pullback—which, for most investors, signals the perfect time to rebalance their portfolio.
And right now, it looks as if the winds on Wall Street are favoring the eurozone. After starting in the latter part of 2011, the longest ever eurozone recession has come to an end.
The economies of the 17-member eurozone grew by 0.3% during the second quarter, which is more than expected; the general consensus had the eurozone climbing at a rate of 0.2%. Some think the stronger-than-expected results provide further evidence that the worst of the eurozone’s debt crisis is over. (Source: “Eurozone comes out of recession,” BBC web site, August 14, 2013.)
But it might not be quite that cut and dry. The growth was driven mainly by business and consumer spending in Germany and France, the eurozone’s two largest economies. During the second quarter, Germany’s economy grew 0.7%, while France’s economy increased 0.5%.
Other countries in the eurozone have not been quite as fortunate. Spain and Italy are still struggling, Greece’s economy slipped 4.6% year-over-year, and the Netherlands and Cyprus are still in recession.
When the eurozone was in the depths of recession, most investors went to great lengths to avoid it, but now, it represents opportunity. With the eurozone in recovery mode, should investors look at companies based in Europe, or U.S.-based companies with heavy European exposure?
While McDonald’s (NYSE/MCD), Ford Motor Company (NYSE/F), and a number of other U.S.-based companies have heavy exposure in Europe, their share prices weren’t really fazed by the eurozone recession.
As the world’s largest integrated economy, Europe is home to more than 120 Fortune 500 companies: drug manufacturer Novartis AG (NYSE/NVS) is based in Switzerland, software provider SAP AG (NYSE/SAP) has its headquarters in Walldorf, Germany, and communications giant Alcatel-Lucent, S.A. (NYSE/ALU) is based out of Paris.
The Vanguard FTSE Europe ETF (VGK) tracks the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of Europe. While the MSCI Europe index is up 26% year-over-year, it is still more than 20% below its October 2007 highs, meaning there is room for growth.
For the most part, large, American-based companies with exposure to the eurozone fared well over the last number of years. Investors looking to take advantage of a rebounding eurozone might want to consider European-based companies whose share prices were actually hampered by the recession.
Tags: debt crisis, eurozone, Federal Reserve
