With the markets in the U.S. trading close to all-time highs as measured by the Dow Jones, S&P and Nasdaq, Europe is still a laggard.
But now that the risks for investing in Europe have subsided substantially with Marine Le Pen losing the French election, Europe is picking up the pace. And that’s why our latest opportunity comes out of Europe.
Le Pen was the far-right nationalist candidate who promised to initiate “Frexit,” a move out of the euro and the eurozone by the French. Unlike Brexit, Frexit would have been devastating. The United Kingdom’s exit via Brexit is less damaging, as the U.K. was not a part of the currency union. It will still trade with the rest of Europe, its largest trading partner.
A French exit, however, would have precipitated a collapse in the currency, and that damage would have had a Lehman Brothers type of effect on markets globally.
But there’s more to the Europe story than what’s happening in France.
In Italy, Matteo Renzi is poised to take back power just a few months after resigning from his position as Italy’s prime minister.
In Spain, Mariano Rajoy is leading a minority government after losing support in last year’s election. But sentiment to leave the euro in both Italy and Spain is starting to lose steam. That will be cemented by the results from France.
Even Europe’s black sheep, Greece, is beginning to show some signs of recovery after massive austerity measures.
I’ll be frank. I am not a proponent of the European Union. I think it is an artificial construct that was not thought out well. As an economic and political union, it will always be at odds with the lack of social unity.
Nonetheless, Europe is cheap. Real estate is a bargain for sure, but so are the shares of Europe’s largest companies.
As you can see in the chart below, European stocks are well behind those in the U.S. The chart by itself signifies little. But to add some perspective to the situation, European shares have historically tracked gains in U.S. shares almost identically.
The split occurred after the Great Recession. The U.S. acted to stimulate the markets almost immediately by lowering rates and injecting trillions of dollars into the system, essentially printing money from thin air to force investors back into risky assets like stocks and real estate. The alternative was to lose money by keeping cash in the bank.
It worked… The U.S. markets have been on a tear ever since.
In Europe, the crisis played out longer. Unemployment soared into the double digits, and housing prices collapsed, as did company profits.
While slow to react, the European Union finally took the same route as the U.S. by embarking on a massive quantitative easing policy, reducing interest rates while at the same time injecting hundreds of billions of euros into the market.
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To encourage risk-taking, many European banks went even further by adopting negative interest rates that would make it so depositors would be charged money for leaving cash sitting in their accounts.
Currencies in the region came …read more
Source:: Investment You
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