European stocks and exchange traded funds (ETFs) have benefited from rising investor appetite for risk. Even though there are positive indicators for looking into investing into Europe, an investor should be aware that possible risks still abound.
Analysts are out making the case for Europe to be the next comeback story. Why?
- Some investors believe Europe is best positioned to benefit from a recovery in share prices over the next year or two, as European economies benefit from favorable monetary policy and companies projecting higher earnings, reports Dave Kansas for The Wall Street Journal.
- Valuations in European stocks have not been stretched too far. The average P/E ratio in Europe is around 16. The price-to-book ratio shows that stocks are trading about 15% under long-term averages. Additionally, historic trends shows the attractiveness of dividend yields as compared to government bond yields.
- Major European markets have jumped from their March lows. Investors are putting more money into European stocks, with inflows exceeding outflows by $2.1 billion.
- U.S. investors are also capitalizing on the weaker dollar by investing in foreign markets. The falling dollar as a result of monetary and fiscal policies will make gains in overseas markets more attractive when investors repatriate the investments, providing a “dollar kicker.”
Still, potential investors should note that Europe’s banking system remains fragile, economic activity is highly uneven and several countries are still grappling with difficult fiscal situations. The main concern in Europe is its financial system. Those outside of Europe feel that European banks are undercapitalized and banking is a large characteristic of Europe’s economy. Chief economist Carl Weignberg at High Frequency Economics also warns of possible deflationary risks.
- iShares MSCI EMU Index (BATS:EZU): up 33.8% year-to-date
- SPDR DJ Euro STOXX 50 (NYSEARCA:FEZ): up 30.6% year-to-date
- PowerShares FTSE RAFI Europe (PEF): up 56.9% year-to-date
Max Chen contributed to this article.