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3 ways to invest in Europe's revival
Germany and France look like the best places to buy into a European rally in 2006. Germany could have the best prospects -- if its consumers start to spend again.
By Jim Jubak
Europe's stock markets are scorching hot so far this year. Fortunately, it's a big continent. So while you may have missed the boat in the United Kingdom and Spain, markets like France and Germany -- especially Germany -- still have lots of room to run.
And, in this column, I'm going to give you three picks you can use to add exposure to Europe's stock markets to your portfolio.
For 2006 to date, the German DAX ($DAX) index has generated a total return of 10.6%. The French CAC 40 ($PARI) has returned 7.6%. Not bad for two month's work. And especially attractive in comparison to the 3.3% return on the U.S. S&P 500 index ($INX) in 2006 to date.
Restructuring and growing
Why have these European indexes beaten their U.S. counterparts so badly in 2006 -- continuing a trend from 2005, by the way? Three reasons.
The French and German economies are showing much stronger growth, compared with their past performances. And, I should add, that's a much bigger improvement in growth than the United States is seeing. The German economy, to take the strongest example of these trends, now looks like it will grow by 2% in 2006. That doesn't sound like much in comparison to the 3.6% growth churned out by the U.S. economy in 2005, as measured by the Organization for Economic Cooperation and Development (OECD). But it represents a huge 80% improvement from the 1.1% growth recorded in 2005.
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France, projected to increase its growth rate to 2.1% in 2006 from 1.6% in 2005, shows a smaller 30% improvement. U.S. economic growth, meanwhile, is expected to shrink to 3.5% in 2006 from 3.6% in 2005.
U.S. money managers and investors concede that some companies in Europe are acting more like their U.S. counterparts. This is in direct contrast to the oft-repeated knock that European companies are hobbled by management-hobbling workplace rules and expensive social policies. This new trend is either great, because it means increased economic rationality, as it's defined in the United States. Or terrible, because it threatens to destroy a European social system that is much more egalitarian than that in the U.S. I think it's fair to say that most U.S. money managers -- and many of their global counterparts -- are proponents of the first view. Certainly, international capital has rewarded companies such as Siemens (SI, news, msgs) -- its shares are up more than 25% in the last six months -- that have undertaken U.S.-style restructurings. The restructuring efforts of a company like Siemens are enough to convince many money managers that the rules have changed in Europe -- finally. For investors interested in profiting from restructurings, Europe is much more attractive than the U.S. just because it has so much work to do to catch up.
Investing in the Old Country's economic takeoff is an attractive alternative for investors worried the U.S. economic recovery is getting long in the tooth. The economies of the Euro zone haven't outperformed the U.S. economy since 2000 (and even then the difference was small -- 3.7% growth in the U.S. compared with 3.9% growth in the Euro economies). No one really expects those economies to show higher growth than the U.S. economy anytime soon. Its the direction of growth rates, rather than their magnitude, that spells opportunity in Europe. While the OECD predicts U.S. economic growth will slow from last year's 3.6% to 3.3% in 2007 (a rate most of the countries in Europe would love to achieve), Euro zone growth rates are projected to grow from 2.1% in 2006 from 1.4% in 2005, and than to 2.2% in 2007.
I'd steer you away from the United Kingdom and Spain for these same three reasons. The United Kingdom was the first European economy to hit its stride with 3.2% growth in 2004. Growth, however, slumped in 2005 to just 1.7%, according to the OECD, and hopes for a pickup in 2006 are based on the Bank of England cutting interest rates to stimulate the economy. Barclays Bank (BCBAY, news, msgs) recently reported a huge 44% jump in charges for bad loans in 2005. Credit card defaults were the biggest contributor to the pop. That's the kind of number that shows up when a period of easy credit, which has produced a booming economy, yields to a period of tighter credit and slower economic growth.
Spain is one of the few countries in the Euro zone actually predicted to see slower economic growth in 2006 than in 2005. The Spanish economy was pumped up last year by the country's own version of a real estate bubble, and that now seems to be unwinding. Growth in Spain in 2006, the OECD predicts, will drop to 3.2% in 2006 from 3.4% in 2005.
An extended trip to Europe
I already own two European stocks in Jubak's Picks -- one French, Alstom (AOMFF, news, msgs), and the other German, Conergy (CEYHF, news, msgs). They've both done well, and I'm going to hold onto them.
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