The Global Guru

The Global Guru: Why Europe is Where the Money is in 2013

Europe has gotten a lot of bad press lately.

Only a year ago, the London Financial Times fretted that the euro had just a few weeks to live. I attended a compelling presentation at the Oxford Business Club that boldly predicted that it was virtually certain that Greece would be out of the euro by the end of 2012. I recall a day in the fall of 2011 when the fate of U.S. markets was held hostage to a vote in the Slovak parliament, which was deciding whether it would approve the latest incarnation of a European bailout for Greece.

Fast forward 12 months, and the picture is very different.

European stocks have trounced the U.S. S&P 500. The Europe ETF MSCI Vanguard (VGK) has soared 18.48% over the past six months. That compares with 8.27% for the SPDR S&P 500 ETF (SPY).

In 2013, the contrast may become even more extreme. Yes, the U.S. S&P has had a strong start, rising 3.2%. But the iShares MSCI Germany Index (EWG) is up 6.37% already this year.

What about the infamous PIGS — Portugal, Italy, Greece and Spain?

Well, the ones for which you can buy exchange-traded funds (ETFs) are doing just fine, thank you.

iShares MSCI Italy Index (EWI) is up 5.41% and Global X FTSE Greece 20 ETF (GREK) is up 4.54%. iShares MSCI Spain Index (EWP) trounces all of them by soaring 6.48%.

In fact, these former ne’er do well stock markets are the top-performing markets in the world among the 37 that I follow for my clients at Global Guru Capital as part of my “Global Gains” investment program.

Why Europe Beats the United States

All of this may leave you scratching your head.

After all, isn’t Europe just a museum stuck in a recession?

How can European stocks be doing so well when France, with its 75% tax rate on high earners, is chasing national icons like Gerard Depardieu to Russia?

Here’s a reality check…

Once the world stopped fretting about Europe’s imminent collapse, the prospects for European stock markets weren’t as bad as investors thought.

It all comes down to good old-fashioned valuation.

First, unlike just about everything else you can buy, European stocks are simply cheaper than those in the United States.

Cyclically adjusted price/earnings (P/E) ratios are among the few relatively reliable predictors of long-term returns. These P/E ratios are at very reasonable single-digit or low double-digit levels in Europe. That compares with an historically pricey P/E ratio of 21 in the United States.

Second, European company margins are at a 20-year average. That compares with the United States, where margins are at an historic high. So Europe has much more room for upside surprises on a company level as well.

The truth is Europe is both “under-owned and under-loved” — and a better bet for 2013 than the United States.

My Favorite European Market for 2013

With so many global markets bursting out of the starting gate in 2013, you may find it difficult to know where to put your money to work.

Yet, if I had a single favorite market in the world at the moment, it would have to be tiny Ireland.

Ireland has suffered severe austerity over the past few years.

But it has sucked it up, stuck to its low tax principles, and its economy has grown over the past two years.

And, yes, there are grumblings that the medicine it took was too bitter, with the Irish taxpayer on the hook for European banks’ bond losses.

In comparison, the noisy Greeks have gotten away with a massive write-down of their obligations.

But perhaps there is cosmic justice after all.

Unlike the Greek economy, the Irish economy has finally turned, and there is light at the end of the tunnel.

And my subscribers at Bull Market Alert have profited handsomely so far in 2013, with my recommendation of Bank Ireland (IRE) soaring 30.62% in 2013 alone.

With billionaire contrarians such as Wilbur Ross and private equity firms buying into Bank of Ireland (IRE) in July 2011, there is plenty of “smart money” behind this trade.

I strongly recommend that you join my Bull Market Alert subscribers by betting on the Irish recovery as well.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

Sincerely,

Nicholas Vardy, CFA
Editor, The Global Guru

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  • Geo.

    Europe may in general be so,ewhat underpriced. But to equate the recovery in Irland after their doing the right stuff, ie. practicing austerity, reducing government spending and cutting taxes, while also ignoring the ongoing fiscal irresponsibilities of Greece and France is hardly rational. Buying the whole feed lot because certain cows are healthy and getting fatter is risky business. Concluding that France will prosper regardless of monster taxes sounds like you may also be falling in love with Paul Krugman. Good Luck and best wishes on that romance. Geo.