By Tim Seymour
I've been harping on European equities since late December. I have been right. But guess what, things have gotten even more lopsided in favor of EU allocations. If you are buying today, you don't have the last 15 big figures lower in the Euro (or 12%) working against your USD based investment.
You are buying with the currency largely at your back. In our view the move over the last few days is an overshoot based on the NFP report last Friday in the US, and the ECB's commencement of QE on Monday in Europe. I have mentioned in passing so I will repeat it today to at least frame my argument: I think the Euro finds support here around 1.06. I think a test to all-time lows is not happening on this move or with these current fundamentals.
So today, the Euro is down another 1% today, making the move now a 6.8% in % days.
The markets claim to know the reason, but do they?
There is this argument out there last few days that the yield differential is why the latest round of Euro decimation is unfolding. Not true.
Including today, here is what it looks like on the 10yr US/German spread:
The opposite is happening. I called this out on Fast Money (@cnbcfastmoney) on Monday when we discussed Europe. Two months ago the battle cry was Europe was bringing US yields down and that the US offered so much more value over Europe. "Where would you rather put your money", was the argument. People were approaching this from a risk perspective and thinking about Greece and maybe Catalonia, and EU growth, etc. We are now 50bps wider on US/Bund spread since ECB QE was announced.
And you can see above, overall spreads are wider by 18bps in the US since Thursday, the day the market restarted a Euro attack with the currency plunging at a faster pace than we have seen at any other point in these sell-offs that started last summer.
Foreign Investors are increasing their allocation to Europe not decreasing. And locals on the continent are not investing abroad en masse. They are looking at EU equities. Why?
Yield differentials continue to blow out even though theoretical arguments might call for the opposite. The practical reality for bonds and stocks is that bonds have limited supply and there is a scarcity value in Europe debt that is frightening. The numbers being bandied about are amazing: 14% of the German bond market would be consumed by current QE based on the rules of purchases (no negative yielders etc), and as much as 7.5% of GDP will be bought back according to UBS economists. UBS claims is the first time since WW2 that the decline of public debt available for investors is declining. And to think, here we were two years ago fearful of an EU sovereign debt crisis. EU QE is not only destroying yields (the ECB goal) but also forcing money into EU Equities (also the ECB goal).
EU equities look amazing relative to the US on so many fronts (we argue on valuation, EPS, positioning) and this argument has gotten better and better in the last few days. Even if you have no other argument, you must consider that the EU equity market is now the only market large enough and liquid enough to absorb all of the displaced liquidity from the rest of the continental bond market.
The charts don't lie either: Europe has outperformed this year. The EuroStoxx50 in USD terms is +2.43% YTD while the SPX is -0.68%. Now that you have had a 10% move in the currency in 28 days, you have a major tailwind as the currency weakness is in the price, the currency benefit for EU exporters and industrials is not in the price.
If looking within Europe Equities, take a look at the companies that are outperforming their sector peers.
Top picks in Europe relative to the Index (they are outperforming the index) over the last month are:
- Airbus (OTCPK:EADSY)
- Inditex (OTCPK:IDEXY)
- LVMH (OTCPK:LVMUY)
- Carrefour (OTCPK:CRRFY)
- Daimler (DDAIY)
- DT Telecom (OTCQX:DTEGY)
- BMW (BAMXY)
- Volkswagen (VLKAY)
- Vinci (OTCPK:VCISY)
- Loreal (OTCPK:LRLCY)
With displaced fixed income investors in the equity market, they may in fact be seeking yield plays. European equities have rarely if ever looked better from a yield perspective and the pressure on many of these national champion companies (teclos, utils, banks) to pay healthy divs has never been greater in the face of falling pension yields and funding issues.
Your best EU div plays:
- SAN, Banco Santander 9%
- E, Eni, Italy 6.9%
- TOT, Total 5.4%
- OTCPK:VIVHY, Vivendi 4.6%
- EON (OTCPK:EONGY), Eon Germany 4.2%
- ORAN, Orange 3.91%
So, if you think you have missed the EU outperformance, dust off your European map and target value and dividend plays you can buy in the USA.
The Emerging Money EuroGlobal Index (EMEGI), +0.43% today, is a US Dollar based index of ten European multinational companies which offer high dividend yields and are positioned to outperform in the current low yield, low commodity price export environment. Please tune into your account for more information.