Home' Trinidad and Tobago Guardian : October 18th 2015 Contents 2SBG FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 18 • 2015
Europe has been a land of disappointment
for years for investors. And they can t
get enough of it. Investors are so hot
for the continent that made "debt crisis"
and "austerity" everyday terms that
they ve plowed more than US$30 billion
this year into mutual funds and exchange-traded funds
that focus on European stocks, a relatively niche category
that has US$81 billion in total assets. The move is part
of a broader migration into foreign stock funds and
away from many US stock funds, which have been
some of the best performers since the financial crisis.
Several motivations are behind the shift, including
the desire to make portfolios less US-reliant and more
like the global stock market. The fits and starts for
European stocks in recent years have also opened up
another attraction, particularly when compared against
a US market that has gone nearly straight up for years
until recently: Vive la valuation.
"I think it s a fairly logical shift: People are seeing
more value outside the US than inside the US," says
Rob Lovelace. He is a senior member of the management
committee of Capital Group, whose American Funds
family is home to some of the largest international stock
The flows into Europe have been erratic. When worries
have flared about Europe s debt troubles, Russia s involve-
ment in the Ukraine or how European exporters will
cope with a weak global economy, dollars have headed
out of the region. Those risks remain, as does the pos-
sibility that a weaker euro could dilute returns for US
Here s a look at what s attracting investors to European
stock funds, as well as considerations that need to be
made before joining the crowd.
• Defeating the "home bias"
Invest in what you know. It s a phenomenon around
the world, and people tend to invest heavily in stocks
from their home country.
That s why foreign stocks make up small portions of
many US investors portfolios, even though they make
up close to half the global market. That s changing.
Investors pulled a net US$7 billion from US stock
funds from the beginning of this year through August,
according to Morningstar. They pumped nearly US$210
billion into international stock funds over the same
• Valuations are cheaper
The surge for US stocks since 2009 means they re
more expensive relative to how much profit they re pro-
ducing. The S&P 500 set its record high this summer
and trades at about 16 times its expected earnings per
European stocks, meanwhile, have been on a bumpier
ride. The MSCI Europe index is still about 30 per cent
below its peak from before the Great Recession, in dollar
The relatively listless performance means the MSCI
Europe index has recently traded at 14 times its expected
earnings. While that s not screamingly cheap, it s less
pricey than the United States.
• The economy is improving
After shrinking in 2012 and 2013, the euro area s
economy returned to growth last year. This year, growth
is set to accelerate to 1.5 per cent, and the International
Monetary Fund expects it to improve again next year
to 1.6 per cent.
That s lower than the expected US growth rate of 2.8
per cent in 2016, but Europe s economy is earlier in its
recovery. The European Central Bank is still in stimulus
mode, while the Federal Reserve has already halted its
bond-buying program and is discussing when to raise
• Profits are playing catch-up
Profitability for European companies is well behind
US companies. If they can close that gap, European
stocks have room to rise, says Dan Ison, portfolio manager
at the Columbia European Equity fund.
Corporate profits usually set records during each eco-
nomic cycle, and that s been the case in the United
States during this expansion. But European corporate
leveraging IT to create business value
profits are still below where they were before
the 2008 financial crisis. Now that Europe s
economy is slowly improving, Ison expects
earnings growth to accelerate.
That has him looking for companies that
do lots of business within Europe to benefit
from the growth. His fund owns construction
and media companies, for example. One of
its biggest holdings is Ryanair, a discount airline
that serves leisure travelers around Europe.
• Currency and other risks
One danger of dropping the "home bias"
is that investors may introduce a new form
of risk to their portfolios. When the euro or
Swiss franc fall in value, it can erode or even
wipe out returns for investors counting their
performance in dollars.
The MSCI Europe index has returned three
per cent this year in local-currency terms, for
example, but only 0.2 per cent in dollars. Some
funds "hedge" to blunt the effect, and the
WisdomTree Europe Hedged Equity ETF and
other hedged funds have become popular.
But if the dollar ends up falling against the
euro, unhedged funds will get a boost from
the currency move while hedged funds won t.
Europe is also still working through its debt
troubles, and each upcoming political election
could fan further worries.
AP's Stan Choe
Europe's allure: Investors
pour billions into the continent
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