Jubak's Journal
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3 ways to profit from Europe's turmoil
Europe is unsettled right now, both politically and economically. But all this turmoil has an upside. Here are three ways to play it.
By Jim Jubak
You know you're in trouble when you get dissed by spectacularly ineffective U.S Treasury Secretary John Snow. But that's exactly what happened to the 25-country European Union last week.
Sounds like a buy signal to me. The news has been so bad for Europe in the last two weeks that I think this is a good time for contrarian U.S. investors to pick up a European equity or two.
Snow's lecture added insult to what has been, by anybody's count, an extremely tough three weeks for Europe. On May 29, the French soundly rejected a new constitution for the European Union. Days later Dutch voters followed suit. The euro, which has been weak against the dollar, kept on falling on that news, hitting a nine-month low at $1.2018 on June 15. Governments in France, Italy, and Germany teetered, and pundits now expect Germany's Gerhard Schroder to go down to defeat this fall.
On June 17, the European Central Bank added fuel to the euro fire when Vice President Lucas Papademos worried that diverging economic performance inside the euro zone was a threat to monetary union. And the sight of Europe's leaders squabbling amongst themselves at the European Union's budget summit in Brussels, with no budget agreement emerging from the meeting, has rattled nerves further. (For more detail on turmoil in the euro zone see my June 7 column, "Thank Europe for a stronger dollar.")
But all this hasn't kept Europe's stock markets from hitting new highs. In fact, all this seeming chaos may actually be fueling the advance. A weaker euro, for a start, means that the products of euro-zone companies sell for less in dollars. That's a big boost to exports for export-driven economies, such as Germany's.
Rate cuts and election hopes
The political dissension has led the European Central Bank to finally admit that it is at least willing to consider the possibility of an interest-rate cut.
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European economic growth is just barely positive; the European Central Bank forecasts just 1.4% growth for 2005. Unemployment is at an official 10.2% in the key French economy, and stands at nearly 25% among workers under 25, That makes the bank's insistence on keeping rates at 2% to fight inflation less and less tenable --especially since even the bank admits that inflation is running below its target rate.
And even the political turmoil has an upside. German investors, for example, believe that a switch from Schroder to Angela Merkel, the likely winner in a late-September contest for chancellor, would produce a more conservative government willing to push reforms in the labor market, reduce regulation and overhaul the tax system. Even if those hopes are dashed once an actual government is in place, right now they're enough to fuel the markets.
Germany's Xetra DAX Index is up 7.6% this year, as of the close on June 16. France's CAC 40 Index is up 9.53%. The Dow Jones Euro STOXX 600 Index is up 9.76%. Even United Kingdom's FTSE 100 Index, while lagging its euro-zone counterparts, is up 4.79% for the year to date. Not at all shabby when you remember that the Dow Jones Industrial Average ($INDU) is down 1.9% for the same period.
3 themes to watch
Technically, all these markets look set to run higher, with charts that look much stronger than their U.S. counterparts, concludes Prudential Equity Group. The German market looks especially attractive because the economy is especially sensitive to exports -- exports accounted for about 21% of Germanys gross domestic product in 2002 -- and corporate profits in Germany stand to get a big boost from the weak euro.
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