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INVESTMENT: Why European Assets Should Not Be Overlooked
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Why European Assets Should Not Be Overlooked

By Michael Dow

BT 201508 40 Investment 001Chaotic, undemocratic, stiflingly bureaucratic, and doomed: these are just a few of the popular choice ways to describe the eurozone and the whole European Union project in general. Though it sounds dramatic to describe this economic and political union of nations in such terms, one can hardly be blamed for having a pessimistic view on the whole thing, given the ongoing lost decade, the political turmoil, the endless bailouts of economically anaemic countries and the successive ECB money printing sprees.

Yet for all the massive problems the eurozone faces there are, believe it or not, a few good reasons why investors with a long time view should still consider buying into certain countries and certain asset classes. The first reason is that, despite all of their structural shortcomings, there are some highly productive economies within this increasingly estranged group. Germany is obviously the jewel in the crown. The country has proven time and time again over the past century or so that it can go from complete economic and political meltdown to a world class economic powerhouse in a few short years. Its manufacturing acumen is extraordinary. Although it is suffering from a severe case of socialist stagnation, France is also home to some of the world's leading high tech manufacturing and financial service firms. Other countries like Sweden, Finland, Belgium, the Netherlands, Italy and Spain also have some very attractive companies and industrial bases that are more than capable of outclassing their global competitors. This is partly why Princeton Professor Andrew Marovcski proclaimed in his book that, "the European Union, not China or India, will still be the world's second superpower for a very long time to come." It is still a much more developed, productive, creative, innovative and business-friendly economic environment than Asia, Africa or Latin America.

BT 201508 39 Investment hlAnother big reason to consider buying into Europe is that from a value perspective the equity markets, the currency and many other asset classes look very cheap compared to those in the US, China, the UK and elsewhere. While these indexes have rocketed to record highs many times over the last year or so it is fair to say that mainland Europe has become a bit of a bargain. This is reflected in many of the popular index funds and ETFs. The Vanguard FTSE Europe ETF (symbol VGK) is a prime example. Right now it is trading at little over half of its historic high several years ago. Although its price to earnings ratio of 16 is nothing to write home about, it is certainly not insanely high, especially when compared to other equity markets across the globe. On top of that it grew by over five percent over the last 12 months and is still producing a solid dividend yield of more than 3%. This kind of pay-out ratio is definitely nothing to be scoffed at in today's extremely low interest rate environment.

Speaking of dividends, it is no surprise that the economic turmoil of recent years has sent yields from some companies through the roof as the valuation of the stock relative to the amount of money they are paying out to shareholders has plummeted. Nobody would deny that firms like Portugal Telecom are buys for the brave but when the common shareholder is getting paid anywhere from a 10-20% yield per year they suddenly look a hell of a lot more attractive. Sifting through the proverbial wreckage to find hidden gems is no easy task but without a doubt there are some out there that are willing to reward savvy investors for holding on to their shares over a long period of time.

Legendary investor Jim Rogers, although not known for his bullishness on Europe or anywhere else in the developed world, once proposed an intriguing thought experiment. He said imagine that the eurozone is completely torn apart by the inherent structural problems of having intrinsically strong and weak economies chained together in monetary and fiscal bondage. Let's assume that the debt ridden nations, whose economies are providing a massive drag on growth and dampening investor sentiment, were to crash out of the eurozone and the catastrophic debt situation was reset. This would certainly include Greece and Cyprus, but perhaps also the highly indebted and stagnant economies like Spain, Portugal, Italy and Ireland.

BT 201508 41 Investment 002Of course there would be panic and mass selling off of stocks, bonds and euros in the short term. But then when we consider that the euro would essentially be a currency that has a value based much more on the productive capacities of Germany, France and all of the other healthier nations. Moreover the European Central Bank would have much less constraints and would be much more likely to return interest rates to higher levels. One can only assume that plenty of big institutional investors would be enticed by the troubled currency. If the pessimists turn out to be right about the eurozone then surely it makes sense to stock pile euros while they are extremely cheap compared to all other major currencies?

The fact is that the eurozone and most of its neighbours are in bad shape right now. There is certainly going to have to be some massive changes and some extremely turbulent times ahead if things are ever going to get better for these economies. However, that doesn't mean that we should write this incredibly powerful trading bloc off just yet. Hard as it may be to ignore the negative news coverage about a possible 'Grexit' and so on, there really might be a few silver linings that are waiting to emerge from this cloud of economic turmoil.


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