Europe has been a land of disappointment for years for investors. And they can’t get enough of it.
Investors are so hot for the continent that made “debt crisis” and “austerity” everyday terms that they’ve plowed more than $30 billion this year into funds that focus on European stocks.
Here’s a look at what’s attracting investors, as well as considerations that need to be made before joining the crowd.
Defeating the “home bias”: People around the world tend to invest heavily in stocks from their home country. That’s why foreign stocks make up small portions of many U.S. investors’ portfolios, even though they make up close to half the global market. But that’s changing.
Investors pulled a net $7 billion from U.S. stock funds from the beginning of this year through August, according to Morningstar. They pumped nearly $210 billion into international stock funds over the same time.
Valuations are cheaper: The surge for U.S. stocks since 2009 means they’re more expensive relative to how much profit they’re producing. The S&P 500 set its record high this summer and trades at about 16 times its expected earnings per share.
The MSCI Europe index, meanwhile, is still about 30 percent below its peak from before the Great Recession in dollar terms. The relatively listless performance means the MSCI Europe index has recently traded at 14 times its expected earnings.
The economy is improving: After shrinking in 2012 and 2013, the euro area’s economy returned to growth last year. This year, growth is set to accelerate to 1.5 percent, and the International Monetary Fund expects it to improve again next year to 1.6 percent. The European Central Bank also is still in stimulus mode, while the Federal Reserve has halted its bond-buying program and is discussing when to raise interest rates.
Profits are playing catch-up: Corporate profits usually set records during each economic cycle, and that’s been the case in the United States during this expansion. But European corporate profits are still below where they were before the 2008 financial crisis. Now that Europe’s economy is slowly improving, Dan Ison, portfolio manager at the Columbia European Equity fund, expects earnings growth to accelerate. That has him looking for companies that do lots of business within Europe to benefit from the growth. His fund owns construction and media companies, for example. One of its biggest holdings is Ryanair, a discount airline that serves leisure travelers around Europe.
Currency and other risks: One danger of dropping the “home bias” is that investors may introduce a new form of risk to their portfolios. When the euro falls in value, it can erode or even wipe out returns for investors counting their performance in dollars. Europe is also still working through its debt troubles, and each upcoming political election could fan further worries. Even bigger issues may be tensions with Russia and Europe’s economic ties with emerging markets. China’s economic growth is slowing sharply.
