The Eurozone economy is trying hard to crawl back to its pre-crisis peak. It is currently grappling with issues like a slower growth rate, slump in bank stocks as well as a refugee crisis. Europe was subject to a continuous inflow of refugees from war-torn nations like Syria, Afghanistan and Iraq. In addition, global headwinds such as the sluggish growth rate in China and a continuous slump in oil prices are causing a lot of heartburn for the region.
The European Central Bank (ECB) introduced reform measures to boost its fragile economy, which fell short of expectations. Nevertheless, the ECB President Mario Draghi's assurance at the European Parliament that more stimulus measures are on the way boosted investor sentiment. He believes that the Eurozone economy is on a firmer ground than what it seems. He also sounded pretty confident about the state of the beleaguered banking sector.
As for the refugee crisis, most of the economists believe that it won't have a large economic impact as it is more of a political issue. In fact, ageing nations such as Germany's manpower will stand to improve. In order to cash in on these positives, investors may look toward investing in Europe-focused mutual funds. These funds not only delivered positive returns during the period of crisis, but are also poised to perform well on the back of an improving economy.
Lackluster Growth, Bank Stocks Take a Hit
The 19-country Eurozone expanded at an annual rate of 1.1% in the final quarter of 2015, less than what it was at the onset of the 2008 global economic crisis. Greece falling back into recession and Italy's economy remaining stagnant were some of the major reasons that pulled back the broader economic growth in the Euro region.
The ECB responded to the crisis by trimming a key interest rate to negative 0.3% in December and extending its bond-buying program of 60 billion euro a month until March 2017. These measures were taken to boost the ailing Eurozone economy and achieve the desired inflation rate of less than 2%. However, these steps were not enough to impress investors as they were anticipating deeper rate cuts and additional asset purchases. The inflation rate in the single-currency area stood at 0.4% in January, way below the level expected.
Meanwhile, banks' stocks in Europe took a beating. The Stoxx Europe 600 Banks Index that covers 47 regional companies engaged in the banking sector tanked more than 20% year to date. Ultra-low interest rates are hampering the profits that banks make from loans. The spread between long-term rates at which banks lend and short-term rates at which banks borrow has shrunk considerably.
A Confident Draghi
Given the wild swings in banks' shares, Draghi reassured investors about the health of the banking sector. Draghi emphasized that even though low-interest rates adversely affected banks, the monetary stimulus measures employed since the financial crisis have increased the resilience level of the broader financial system.
He said that Eurozone banks have boosted their financial strength by increasing core tier one capital ratios from 9% to 13%. The banks are also in a "good position" to handle bad loans. He added that "the ECB's supervisory arm is working closely with the relevant national authorities to ensure that [their] non-performing-loan policies are complemented by the necessary national measures."
Moreover, Draghi said that "[they] will not hesitate to act" to stimulate the Eurozone economy and push the inflation rate to its desired level. He pledged to revive the economy by "reviewing and possibly reconsidering the monetary policy stance in early March." He has already fought back to improve sentiments by keeping interest rates unchanged in January.
After hearing from Mario Draghi, economist Howard Archer of IHS Global Insight said that the ECB may cut the interest rate from a negative 0.3% to a negative 0.4% in March. The ECB might also increase its asset purchases by 20 billion euro to 30 billion euro from the current level. If this comes about, stocks are certainly expected to move north.
5 Euro-Focused Mutual Funds to Buy
Given the optimism exuded by Draghi, investors might have a look at funds exposed to the Eurozone. Our analysis is based on selecting funds that have overcome bottlenecks by posting commendable returns. Further, fueled by solid fundamentals, these funds are also poised to perform well in the near term.
These funds have positive 3-year and 5-year annualized returns, carry a low expense ratio, have minimum initial investment within $5000 and possess a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). When it comes to the refugee crisis, however, it will be prudent to keep an eye on the region to arrive at informed decisions.
Fidelity Europe (MUTF:FIEUX) seeks growth of capital over the long term. FIEUX invests a large portion of assets in securities of European issuers and other investments that are tied economically to Europe. This fund's 3-year and 5-year annualized returns are 1.6% and 1.4%, respectively. Annual expense ratio of 1.01% is lower than the category average of 1.47%. FIEUX has a Zacks Mutual Fund Rank #1.
Invesco European Growth A (MUTF:AEDAX) seeks long-term growth of capital. AEDAX invests a major portion of its assets in securities of European issuers and in derivative instruments that have economic characteristics similar to such securities. This fund's 3-year and 5-year annualized returns are 2.1% and 4.5%, respectively. Annual expense ratio of 1.37% is lower than the category average of 1.47%. AEDAX has a Zacks Mutual Fund Rank #2.
T. Rowe Price European Stock (MUTF:PRESX) seeks long-term growth of capital. PRESX invests the majority of its assets in European companies. This fund's 3-year and 5-year annualized returns are 3.1% and 4.2%, respectively. Annual expense ratio of 0.95% is lower than the category average of 1.47%. PRESX has a Zacks Mutual Fund Rank #2.
JPMorgan Intrepid European A (MUTF:VEUAX) seeks total return from long-term capital growth. VEUAX invests primarily in equity securities issued by companies with principal business activities in Western Europe. This fund's 3-year and 5-year annualized returns are 2.4% and 2.9%, respectively. Annual expense ratio of 1.41% is lower than the category average of 1.47%. VEUAX has a Zacks Mutual Fund Rank #2.
Fidelity Nordic (MUTF:FNORX) seeks long-term growth of capital. FNORX invests a large portion of assets in securities of Danish, Finnish, Norwegian and Swedish issuers and other investments that are tied economically to the Nordic region. This fund's 3-year and 5-year annualized returns are 10.5% and 7.5%, respectively. Annual expense ratio of 0.99% is lower than the category average of 1.86%. FNORX has a Zacks Mutual Fund Rank #1.