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Investment of the quarter: European stocks

Europe has been unloved by investors for a long time. The debt crisis and consequent political uncertainty about the future of the euro has understandably had investors running for safer places to put their money.

Europe has been unloved by investors for a long time. The debt crisis and consequent political uncertainty about the future of the euro has understandably had investors running for safer places to put their money.

However, with the US going through a debt crisis of its own – with unforeseeable consequences on emerging markets – it may be time to rethink investment in Europe.

Europe managed to record growth of 0.3% in the second quarter of the year. While this is hardly the kind of growth that would usually excite investors, it marked the emergence from an 18-month recession across the continent, and coincided with growing confidence among the region’s businesses over the summer months.

Analysis group Markit’s eurozone composite PMI index rose at its fastest rate in over two years in August, and showed improving sentiment in Italy and Spain.

Portugal surprised by delivering growth of 1.1% in the second quarter, ahead of the region’s larger and seemingly healthier economies, hinting at opportunities for value investors in peripheral economies.

Over five years, the continent’s stock market, as tracked by the blue-chip Euro Stoxx 50, has risen 22.6%. By comparison, Stoxx Emerging Market 50 has jumped 86.9%, and the Stoxx USA 50 by 63.4%. This has left Europe at a discount, particularly relative to the US.

Recently though, Europe has emerged as a regional “stock leader”, with the Euro Stoxx 50 climbing 19.4% in the last 12 months. Most recently, markets have rallied in Italy and Spain, causing the eurozone area to outperform.

Within Europe, there has been divergence between export- and domestic-focused companies. Companies with relatively more exposure to the eurozone have been left behind, while defensive stocks like consumer staples, which tend to have international markets, are more expensive.

Value investors could look to companies with customers in the eurozone, and southern Europe in particular, for opportunities.

Of course, a lot remains to be seen. Particularly, whether Europe can maintain and speed up the growth that is beginning to be priced into its stock market. The continent is no longer a contrarian play, and as the “crisis discount” disappears, the region’s politicians will need to prove they have achieved long-term stability.  

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