Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

What to Do About Europe?

By

It seems like there are always lots of stock activities and crises going on in Europe, leading to various investment questions.

PrintPRINT
The question about the future of Europe is not quite as pressing a question as what to do about what could be the start of a breakdown in the US market, which was seen in last Thursday's trading. Or what to do about a Japanese stock market that seems afraid to commit to a weaker yen. Or what to do about China where growth is either surprisingly strong or disappointingly weak.

But after data last Wednesday, August 14, indicating that the eurozone had moved out of recession in the second quarter, what to do about Europe is an important question for investors.

Should you jump in -- or add to weightings in your portfolio -- on modest but hopeful GDP numbers? Growth for the second quarter was positive, but not by all that much at 0.3%. Take away the 0.7% growth in Germany and the 0.5% growth in France, and the eurozone would still be stuck in recession.

And if the answer is buy, what stocks or kinds of stocks should you be targeting?

Let me give you a general framework for thinking about European markets (in the eurozone and in the larger European Union) and stocks, and then a couple of specific suggestions for stocks that I think fit the current situation.

My framework for thinking about European markets breaks down into three general statements.

First, remember that at 0.3% growth, and the strong possibility of even weaker growth for the rest of 2013, we're talking about a recovery that is even slower and weaker than that we've seen in the United States. Investors aren't looking at strong growth, so much as an end to declining growth. This isn't the kind of strong growth that lifts all ships.

Second, the eurozone was an export-oriented economy (thanks to Germany's weighting as the largest economy in the eurozone) before the euro debt crisis, and it has become even more export-oriented since the crisis, as countries such as Spain and Portugal have decided that they have to export their way out of their recessions. This is important since a recovery in European economic growth is relatively less important to an exporter that is suffering falling or stagnant sales because growth is slowing in China. Many of Europe's companies have looked to emerging markets for growth in recent years, and now that strategy, which is sound in the long run, is taking a bite out of revenue growth in the short term.

Third, many European stocks have already moved up in anticipation of an end to the recession. And in these cases, you aren't buying gems overlooked by everyone else. Stocks that have gained 40% to 50% in the last year aren't uncommon in the markets of the region. And in beaten down sectors, such as banking and alternative energy, you'll come across stocks that are up 100% or more in the last 12 months. French bank Credit Agricole (EPA:ACA) (OTCMKTS:CRARY) in Paris and in New York, and Danish wind turbine manufacturer Vestas (CPH:VWS) in Copenhagen are two examples, up 106% and 289%, respectively. I'm not saying that you shouldn't buy a stock just because it's up 100%. I am saying that with a stock showing that kind of return, you should make sure that you think there's more upside ahead for you.

So what would I suggest here?

I'd concentrate on domestically focused European companies in the strongest European economies. I'd leave great exporters, such as Finland's Kone (HEL:KNEBV) in Helsinki, for a day when growth in China is more predictable. If you sell escalators and elevators, which is what Kone does, a big part of your growth depends on the trend in emerging market -- and especially Chinese -- residential and commercial construction.

My preference in European markets at the moment is companies such as Kingfisher (LON:KGF) in London, a big do-it-yourself retailer; think Home Depot (NYSE:HD) with a big market share in the improving economies of the United Kingdom, France, and Poland. I'd look at Danone (EPA:BN) (OTCMKTS:DANOY) in Paris and in New York, where sluggish demand in Europe has been a serious drag on growing emerging market sales. I think even modest improvement in its core European markets would mean a big boost to the company's bottom line. Volume in Europe fell by 1.6% in the second quarter. (The world's biggest cosmetics company, L'Oreal (EPA:OR) (OTCMKTS:LRLCY) in Paris and in New York faces a similar European growth problem, which has been a drag on the company's increasing penetration of emerging markets.) Whitbread (LON:WTB) in London used to get its growth, such as it was, from its brewery business. Now it comes from its Costa coffee shops and the Premier Inn budget hotel chain. Continental (FRA:CON) (OTCMKTS:CTTAY) in Frankfort and in New York sells to just about every European automaker, and it is a good way to play the turnaround in European auto demand. The US's BorgWarner (NYSE:BWA) is another way to play that recovery in demand.

I'd be cautious here because any turmoil in the US market in September will spill over in global markets and also because the European recovery is very tentative at this point. We could even get another quarter or two of economic contraction in the last half of 2013.

Time to research and nibble rather than gobble.

Editor's Note: This article was written by Jim Jubak of MoneyShow.

Below, find some more great investing and trading content from MoneyShow:


Don't Ignore the Market's Hurdles

Oil Supermajors Need to Go Back

Royalty Favorite for Golden Gains

Twitter: @TopProsTopPicks

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Danone and L'Oreal as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund's portfolio here.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE