2 ETFs for Europe’s Rebound

What’s the last place you’d look for big stock gains?

It’s no surprise to us if you said Europe. Over the last decade, European markets have been plagued with lackluster economic growth, negative benchmark interest rates, and social and political challenges.

The U.S.’s tech-centered market as well as markets in China and other robust, emerging economies, have long overshadowed European stocks.

But right now, Europe is positioned to have the highest chance for market outperformance in years. 

Barrons reporter Nicholas Jasinski writes, “A postpandemic rebound could be followed by a new era of policy support for the Old World’s economy, creating near-ideal conditions for its equity markets.”

Today, we’ll explore why Europe is in the perfect position for an economic comeback and how you can take advantage of European stocks to boost your portfolio.

Europe Reopens 

Up until now, the U.S. has outpaced Europe significantly when it comes to vaccinating citizens with the Covid-19 vaccine. 

According to Our World in Data, an Oxford University project tracking the global vaccine rollout, multiple countries, including Italy, Denmark and Belgium, have already surpassed the U.S. in terms of the percentage of people who have received one dose.

Overall, the U.S. has a 54% vaccination rate, and Europe has a 49% vaccination rate. The gap between the countries is clearly closing, and we can look to trends in the U.S.’s reopening to make predictions about the future of the EU. 

With higher rates of vaccination come fewer restrictions, more economic activity, and higher rates of hiring and spending. 

Graham Secker, Morgan Stanley’s chief European equity strategist, makes his predictions for economic growth moving forward stating:

Investors have played the reopening theme in the U.S. with a lot of success. Now, there’s a general feeling that most of the good news about the U.S. economy is behind us, rather than ahead of us, and that growth momentum is peaking, whereas Europe is earlier in the cycle, and relative economic news flow is going to start to move in Europe’s favor.

While the U.S. has turned its attention to The Federal Reserve and scaling back current monetary policy, Europe hasn’t even begun distributing its large stimulus package and has no plans to roll back bond purchasing or increase interest rates. 

Europe’s Stimulus

Europe’s version of The American Rescue Plan kicks in this month.

The almost 800 billion euro ($950 billion) NextGenerationEU recovery fund was agreed to in July 2020 and includes loans, grants, and contributions to existing programs in all of the European Union’s 27 member states.

The recovery fund will be financed with bonds issued by the entire European Union, not individual countries, due through 2058. This type of fiscal integration is relatively new for the EU and marks an important turning point for a fiscal union throughout Europe. 

In the global financial crisis a decade ago, fiscal-austerity measures across Europe hampered growth, so this time around, the EU was determined not to make the same mistakes.

The European Commission is also reevaluating the framework under which EU member states are subject to certain budget-deficit caps or debt-to-GDP ratios. Additionally, the European Central Bank is expected to release a monetary-policy review that will adjust targeted inflation from “below, but close to, 2%” up to around 2%. 

All of these changes have the power to support continued economic growth (even after the pandemic), allow for more flexibility for the economy to “run hot,” and focus on the countries most in need. 

European Stocks Offer Deals

Another reason many are taking a second look at the European markets is because investors are facing ultra-high valuations in U.S. stocks. Meanwhile, indexes in Europe are trading at much more reasonable prices.

For example, the pan-Europe Stoxx Europe 600 fetches 16.5 times 2022 estimated earnings, while the S&P 500’s price/earnings multiple is only 20.4.

The large gap has a lot to do with America’s reliance on Big Tech and growth companies to boost the markets. European markets, on the other hand, tend to have more exposure to value-oriented and cyclically sensitive sectors, such as industrials, banks, and materials.

Burns McKinney, senior portfolio manager of the Virtus NFJ International Value fund, advises, “If you want exposure to the global recovery, Europe is a good catch-up play. As an investor, you want to look for places where there’s room for improvement.”

Optimistic analysts expect European equities could gain another 10%. 

Investment Opportunities 

Tourism, banking and defense are all industries that are positioned to benefit from the economic reopening. 

If you are looking for broad exposure to the market, you should consider The Vanguard FTSE Europe exchange-traded fund (VGK) and iShares Core MSCI Europe ETF (IEUR).

While tourism in southern Europe tends to be the most popular, it was also hit the hardest by the pandemic. Chris Hare, an economist at HSBC, explained that tourism in southern Europe is still expected to be 50-60% lower than 2019 levels. 

For this reason, it’s advised that you set your sights up north for investment opportunities where tourism suffered less of a slump.

One great investment opportunity is Scandic Hotels Group (SHOT.Sweden), which operates a network of 280 hotels in the Nordic region, Germany, and the U.K. Morgan Stanley analyst Jamie Rollo predicts that Scandic’s stock will return a multiple of 15.3 times expected 2023 earnings. 

Another tourism-related stock with high growth expectations is Fraport (FRA.Germany), a German transportation company with 31 global airports. However, its main business is Frankfurt Airport, which accounted for 51.8% of group sales in 2019 and 73% in 2020. 

Travel sites are another option to consider, such as  Booking Holdings (BKNG), which gets the majority of its profits from Europe. Matthew McLennan, who co-heads the $50 billion First Eagle Global (SGENX) and $15 billion First Eagle Overseas (SGOVX) funds, commented, “When they come out on the other side, they should be earning more than they earned before the pandemic. The next peak in earnings should be higher than the prior.”

It is clear that Europe is poised for a comeback; don’t let the opportunity to invest in their success slip by…

To a Richer Life,

The Rich Life Roadmap Team 

 

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