European ETFs: Is the Bear Market Finished or Just Beginning?

The last 5 years have been extremely kind to European investors. The iShares MSCI EMU (European Monetary Union) Index (EZU) gained approximately 195% total return while the iShares S&P Europe 350 Index (IEV) posted 5-year cumulative rewards of 145%.

Yet the fear of a U.S. recession has plagued international markets. And the fear that banks around Europe also hold worthless subprime debt has only made matters worse. (Credit Suisse (CS) of Switzerland is due to report today and many believe that CS dodged the subprime bullet.)

By our standards, Europe is perilously close to the bear ranks already. Both the Monetary Union (EZU) and Europe 350 (IEV) closed Friday roughly 19% off of their Halloween (October 31, 2007) peaks.

But before sticking a fork in a diversified region that includes 11 economies (e.g., Austria, Belgium, France, Germany, Greece, Spain, etc.), one might recollect another recent sell-off. European stocks fell 15%-20% in the summer of 2006 before reasserting themselves in the fall.

Granted, the "problems" in 2006 were mostly psychological. Economies were humming. Companies were growing. And a health-restoring pullback didn't get out of hand, thanks in part to the U.S. Federal Reserve halting its rate-hiking campaign.

Today, problems are more severe, both real and imagined. That said, European equity markets may be at a crossroads.

For instance, is there enough resistance for the EZU in and/around the 100 level? One might note how well this held up in March of 2007.

The fundamentals still look rather attractive. With EZU, one gets a 3% yield on a P/E ratio that is less than 13.

The question for long-term investors may be put this way: After having fallen nearly 20% already, will EZU be at least at the same price point of 100 that it is at today? If so, then the 3% yield is as good as a money market with the potential for impressive capital appreciation.

Conversely, if we have entered a protracted bear market, the approx 20% that EZU gave up since October 31, 2007 would only be the beginning. We may see an additional 20% depreciation (40% top to bottom) such that, any offset in yield, may not make EZU worthy of entering right now.

Personally, I view today, with all of the persistent negativity, as a lower-risk entry point for European stock exposure. One can always... and should always... protect against excessive downside risk by using a stop-loss.