Why Europe’s Stock Market Offers Great Value as a Long-Term Investment

The stock markets in Europe severely fell short of the U.S. stock market’s performance this year. The euro zone region has a 40% chance of slipping back into recession in the first half of 2015, according to the International Monetary Fund. The economic data is disturbing for investors. But there’s no correlation between stock market performance and economic growth in foreign investing. European stocks offer great value for long-term investors given that the markets should recover as declining oil prices boosts business profits and stokes consumer spending. Meanwhile, a feeble euro will promote tourism and exports.

The MSCI Europe Index dropped 7.5% year to date (through Nov. 13), trailing the U.S. stock market’s 10% jump year to date, according to MSCI. Portugal and Austria crashed into bear markets, tumbling 33% and 26%, respectively, year to date (through Nov. 13). Greek stocks nose-dived 34% year to date. Kyriakos Mitsotakis, the Minister of Administrative Reform, said economic uncertainty will be the norm until the February elections.

Vanguard MSCI EU (ARCA:VGK) experienced $2.1 billion in outflows in October, according to ETF.com. Investors pulled $558 million in assets from iShares MSCI EMU (NYSE:EZU) while redemptions in SPDR Euro STOXX 50 (FEZ) totaled $376 million.

The Euro Area Sentix Investors Sentiment index plummeted to -14 in October after diving into negative territory in September for the first time this year, according to TradingEconomics.com data. It climbed slightly to -12 in November. The contrarian indicator has proven in the past that investor sentiment is most optimistic at market tops and most dire at market bottoms. The index surged to an all-time high of 42 in June 2007 near the prior bull market top. It slipped to an epic low of -43 in March 2009 -- the same month the latest bull market started.

I advise investors put at least 5% of their portfolios in Europe via the $4.4 billion Dow Jones EPAC Select Dividend (NYSE:IDV) ETF (IDV). The ETF is trading at a deep discount relative to the U.S. and pays a 5% dividend. Its price-to-earnings ratio is merely 14 vs. 16 for U.S. large caps. It’s changing hands at a price-to-book ratio of 1.7 vs. 2.5 for U.S. large caps. IDV has a price-to-sales ratio of 0.7, which is less than half the U.S. large caps’ P/S ratio of 1.9.

Economic data out of Europe is worrisome as they should be for the stock market to climb a wall of worry typical of bull markets.  In October, the euro zone’s manufacturing PMI lifted to a reading of 50.6 -- hardly over the 50.0 level indicating flat activity. And that was an improvement over September’s reading of 50.3 -- a 14-month low.

However, free falling oil prices should spur consumer spending and increase manufacturers’ margins. Given that the euro is flirting with a two-year low against the U.S. dollar, euro zone exports and tourism should attract foreign money.

An improvement in Eurozone business and consumer confidence in October from the September lows may encourage businesses to increase capital goods spending and spur consumer spending, especially on durable goods, Howard Archer, chief U.K. and European economist at IHS Global Insight, wrote in a note Nov. 3.

“Heightened geopolitical tensions particularly related to Russia/Ukraine have weighed down on confidence across the Eurozone, reinforcing still challenging conditions in many countries and this has likely caused some orders to be delayed or even cancelled,” Archer wrote. “Meanwhile, credit conditions are currently still tight in many countries, unemployment is still elevated and seems likely to creep down at best over the coming months, private and public debt levels remain high in several countries, while consumer purchasing power is constrained by generally limited wage growth.”

Japan’s central handed stock markets globally a monstrous treat on Halloween by announcing plans to boost annual government bond purchases by $723.4 billion in addition to buying Japanese REITs and ETFs. The Bank of Japan’s stimulus puts serious pressure on the European Central Bank to purchase more bonds and take on more quantitative easing, which would resuscitate Europe’s stock market.