Is it too late, or too early, to buy Europe?

The eurozone may be moving out of recession, but the European markets are not yet out of the woods.

By Jim J. Jubak Aug 16, 2013 6:24PM

What to do about Europe?


It’s not quite as pressing a question as what to do about what could be the start of a breakdown in the U.S. market in Thursday’s trading. Or what to do about a Japanese stock market that seems afraid to commit to a weaker yen. Or what to do about China, where growth is either surprisingly strong or disappointingly weak.


But after this data, indicating that the eurozone had moved out of recession in the second quarter, what to do about Europe is an important question for investors.


Should you jump in -- or add to weightings in your portfolio -- on modest but hopeful GDP numbers? Growth for the second quarter was positive, but not by all that much at 0.3%. Take away the 0.7% growth in Germany and the 0.5% growth in France and the eurozone would still be stuck in recession.


And if the answer is "buy," what stocks or kinds of stocks should you be targeting?

Let me give you some general framework for thinking about European markets (in the eurozone and in the larger European Union) and stocks,  and then a couple of specific suggestions for stocks that I think fit the current situation.


Image: Europe (© Photodisc/SuperStock)My framework for thinking about European markets breaks down into three general statements.


First, remember that at 0.3% growth and the strong possibility of even weaker growth for the rest of 2013 we’re talking about a recovery that is even slower and weaker than that we’ve seen in the United States. Investors aren’t looking at strong growth so much as an end to declining growth. This isn’t the kind of strong growth that lifts all ships.


Second, the eurozone was an export-oriented economy (thanks to Germany’s weighting as the largest economy in the eurozone) before the euro debt crisis and it has become even more export-oriented since the crisis, as countries such as Spain and Portugal have decided that they have to export their way out of their recessions.


This is important, since a recovery in European economic growth is relatively less important to an exporter that is suffering falling or stagnant sales, because growth is slowing in China. Many of Europe’s companies have looked to emerging markets for growth in recent years and now that strategy -- sound in the long run -- is taking a bite out of revenue growth in the short term.


Third, many European stocks have already moved up in anticipation of an end to the recession. And in these cases you aren’t buying gems overlooked by everyone else.


Stocks that have gained 40% to 50% in the last year aren’t uncommon in the markets of the region. And in beaten-down sectors such as banking and alternative energy, you’ll come across stocks that are up 100% or more in the last 12 months. French bank Credit Agricole (CRARY) and Danish wind turbine manufacturer Vestas (VWDRY) are two examples, up l06% and 289% respectively. I’m not saying that you shouldn’t buy a stock just because it’s up 100%. I am saying that, with a stock showing that kind of return, you should make sure that you think there’s more upside ahead for you.


So what would I suggest here?


I’d concentrate on domestically focused European companies in the strongest European economies. I’d leave such great exporters such as Finland’s Kone (KONE) and for a day when growth in China is more predictable. If you sell escalators and elevators, which is what Kone does, a big part of your growth depends on the trend in emerging market -- and especially Chinese -- residential and commercial construction.


My preference in European markets at the moment is for companies such as Kingfisher (KGFHY), a big do-it-yourself retailer (think Home Depot (HD)) with a big market share in the improving economies of the United Kingdom, France and Poland.


I’d look at Danone (DANOY), where sluggish demand in Europe has been a serious drag on growing emerging market sales. I think even modest improvement in its core European markets would mean a big boost to the company’s bottom line. Volume in Europe fell by 1.6% in the second quarter. (The world’s biggest cosmetics company, L’Oreal (LRLCY) faces as similar European growth problem that has been a drag on the company’s increasing penetration of emerging markets.)


Whitbread (WTBCY) used to get its growth, such as it was, from its brewery business. Now it comes from its Costa coffee shops and the Premier Inn budget hotel chain. Continental (CTTAY) sells to just about every European automaker and is as good way to play the turnaround in European auto demand. (The U.S.’s BorgWarner (BWA) is another way to play that recovery in demand.)


I’d be cautious here because any turmoil in the U.S. market in September will spill over in global markets -- and because the European recovery is very tentative at this point. And we could well get another quarter or two of economic contraction in the last half of 2013.


Time to research and nibble, rather than gobble.


Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Danone and L’Oreal as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio.


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34Comments
Aug 16, 2013 7:25PM
avatar

that which melts up may well melt down .... beware the day of reckoning ....

 

DEBT TO GDP RATIOS (Ranked by World Order):

2.  Greece 166%  (Japan is No. 1 at 236%)

3.  Italy 127%

5.  Poland 124%

6.  Ireland 118%

7.  Portugal 104%

8.  Belgium 100%

9.  France 90%

10.  UK 90%

?  Germany 80%

 

ALL of the above European countries at more than the U.S. at 72%.  Just who is more likely to blow up first??? 

 

Aug 17, 2013 7:17AM
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I agree with Active RIA... we have a substantial investment in Europe that isn't ever going to be repaid. Europe has NO economy. WE have no economy either. The markets need to tank to draw out all of the fakeness keeping bad bubbles inflated.
Aug 16, 2013 11:58PM
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The "positive" numbers in Europe are just a matter of Germany (and a few other small Euro countries) doing slightly better than all the rest (PIGS and France) are doing worse. Unless half the young people in the PIGS countries emigrate to Germany or elsewhere, they have no jobs. If they do, of course, the PIGS have no future. Is that something great to invest in?
Aug 18, 2013 7:22PM
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A blog...

new

 

Word is-- while numerous articles are telling the public to "buy gold" some rather large positions in gold are selling. I'm told that when extremely large amounts of metals are advertised, there is a wait before the transaction to cover the impact on price. I was unable to determine if the seller is a nation or wealthy person but I was advised that more than one large quantity are posted for sale. The interesting part is-- gold is unlikely to be anyone's currency so the price is fully speculative now. As for your take on stocks... I agree, there is nothing to stop a continued sell-off and printing is suicide for all nations doing it. You realize that bonds are now exposed. When the Greek debt was last negotiated, the audit of collateral came back without any. Unsubstantiated currency and unsecured sizeable debt instruments. Bloated stock prices with dysfunctional business platforms that cannot seem to find the "talent" they seek while 90 million validated skill sets remain mired by a job blockade. If I had money in this... I would be doing everything possible to get it out NOW.

Aug 17, 2013 10:35AM
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Just who is more likely to blow up first???

 

The US could be in for a licking if we have to really start paying 4-5% on $17 trillion in debt on top of the $4 trillion in Medicare and Social Security debt that the US Treasury owes those two agencies.  2016 could be the beginning of the next great recession.

Aug 18, 2013 11:00AM
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"Unless half the young people in the PIGS countries emigrate to Germany or elsewhere, they have no jobs."

 

How many people know that when Greece rebelled and collapsed their banks- the financiers, bankers and administrators fled to Germany AND WERE GIVEN JOBS THERE. Subsequently, ties with these people were completely severed and-- when Central Banks FORCED Greece into this last financial arrangement and went to examine "assets"... found nothing at all. Germany doesn't have an economy either... it's a clever Robbing Peter and not disclosing, Paying Paul but not real money, situation. The TRUTH about the global today is-- there aren't actual economies anywhere, just paper and button pushing to make it look like activity. From a public perspective, it's been global stagnation leading into 2000, more evident since 2007... fully dead now in 2013. And no, we aren't going to suddenly resort to gold as an alternative currency. We'll see WW III if any Congressional Terrorist attempts to run again. 83% of us already want all of DC flushed. Somewhere between Chaos and Continued Corruption is the right place to end up... it may be a very difficult goal to achieve.

Aug 18, 2013 11:40AM
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V_L agreeing with Crazy about investing in Global companies, is hardly a lame idea...

Having investments in Wall St. type entities is hardly a waste of time...Just ask Regal or Fat Cat..

Having a 100% of investments in (outside of real estate) might be a bad choice.

 

But by using "conventional wisdom and advice" we have less than a 1/3 of assets tied up in W.S.

More like about 1/4, and the rest is diversified across many sectors, RE, Savings(CDs) outright cash, collectibles, jewelry, land and mineral leases, timber, cars, etc.

 

Then we have several checks come in on a monthly or quarterly basis, to spend or bolster our savings.

Having a collapse may hurt us, but hardly will it take us out...We do not or haven't been spending dividends from Stocks...We don't need to. We enjoy the "compounding effect." 

So I hardly think we are the "dumb seniors" of your accusations or are, what you are looking for.

 

I wish you luck in your quest, of belittling others, dooming and glooming the masses and pushing your agendas of disruption; But I hardly think it will accomplish much with us.

Aug 18, 2013 9:22PM
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I'm beginning to get that feeling again.  You know the I'm about to see the street do that last second surge thing and then elevator down. Cramer started in with Farcebook, and then the pump of MSFT and Apple. Fraud Street needs some action. Almost three months flat now sumpins gotta give.
Aug 21, 2013 10:31AM
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Ya gotta get a kick out of the string puppets and how they come about to defend one another during STALLATION. Are all of these 50/50 half truthers the same entity?

 

Quote:

V_L.....I'm to the point of not even wanting to describe you, for your little man, snide remarks.

I'll leave that up to Fat Cat, Regal, Crazy and several others; Because I just believe you are a "lost soul."

So sing praise or degradation, as you wish; I have no more time to waste on you, either way. 

(end of quote)

 

or,

 

Quote:

Classic do me a favor and get some insight, on Gold and the Precious Metals trade...FOREX, etc.

Try kitco dot com...

Do not attempt to gain complete knowledge here, and especially from someone with NO CLUE.

(end of quote)

 

No clue hey. Well you certainly put the shoe where it fits! In your own mouth that is!

 

Try kitco? You really are joking! kitco.... oh you mean just go see jpm and they will tell you first hand of the years of comex rigging and paper,paper,paper sales with NOTHING to back it in terms of physical.

 

You are very late to try exploiting protection on PONZI with the muppet crew you suggest.

 

It is possible folks for those such as the quoted to wake from their stupor they have fallen into.

 

Aug 17, 2013 9:21PM
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You have to be an idiot, to do anything except buy gold, silver, platinum or diamonds.
Take physical possession and keep them in  your safe deposit box..
The nanny staters in Europe/dem bloodsuckers in the USA, will continue to do what they are doing until they kill the economy
When they finally hit bottom and stop the buying votes with handouts, you can look around.
Till then, leave it in precious metals until the inept lying quasi socialist in the white house is an esoteric historical footnotes.
Aug 18, 2013 10:14PM
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V_L.....I'm to the point of not even wanting to describe you, for your little man, snide remarks.

I'll leave that up to Fat Cat, Regal, Crazy and several others; Because I just believe you are a "lost soul."

So sing praise or degradation, as you wish; I have no more time to waste on you, either way. 

 

As for some big boys running on some of their positions in Gold; That is true, and the masses should be aware....Some are culling, others putting monies elsewhere..

We all do what we think is right for us, occasionally we fail, other times succeed.

Just human nature of the beast...

Are stocks or other items over-valued maybe so ?....Do I think we have correction afoot, probably so.

I have mentioned it for several days or weeks...Not for a year or two.

What are we going to do about it beforehand ?   That decision is still in caucus...

Aug 17, 2013 12:42PM
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Think I related to this in the past week or two..?

European and Asian along with Middle Eastern monies are investing within American Shores..

Why as Americans would we need off shore investments at this time...Riskier at times occasionally and a different set of taxing standards.

 

Within last 6 months last European investment pulled..

And within last 12 months all Asian investments pulled..

All put back into American Companies..

 

In total agreement with Crazy 8s....Invest in Multi-National American Companies if you want Foreign exposure at this time...We have about 10-12 different ones, including a Canadian Gold miner.

Aug 18, 2013 10:23PM
avatar

Classic do me a favor and get some insight, on Gold and the Precious Metals trade...FOREX, etc.

Try kitco dot com...

Do not attempt to gain complete knowledge here, and especially from someone with NO CLUE.

 

You are fond of pasteing websites, and this one will give you more ideas than you could ever hope to make use of...

Aug 19, 2013 10:43AM
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Classic Lady;Let me guess,you`ve never made a bad investment.
Aug 18, 2013 10:43PM
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Re tog
As you know i am  invested in Precious metals.Most of my significant purchases were made in              97-98-99.  My Gold investment is UP 550-600% 
I am comfortable at this time with those investments. Gold has Exceeded my expectations . My silver and platinum have not performed to my anticipations,and i have decided to go LONG on all of them

My stock portfolio is a very nice sum, but that is strictly for the GOLDEN YEARS 
My main goal at this time is to bring my businesses back to where they were ""2007 "'numbers, i refuse to have the economy dictate my success in these area's
Time to RE-INVENT AND REJUVENATE  MY INDUSTRY
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