Tired of getting merely good returns from U.S. stocks? Looking for greener pastures?
I’ve got just the place for you: Europe.
That’s right, Europe, which just a few short years ago seemed headed to the fiscal abyss, as first, Greece, then Spain and Italy, were on the brink of default.
Now, Europe’s all the rage among global investors, who cite the Old Continent’s lower valuation than the relatively expensive Standard & Poor’s 500 index and the European Central Bank’s much more accommodative monetary policy than that of our own Federal Reserve.
So, should you sell U.S. stocks and take the plunge into European markets?
In a word, no.
Not that you shouldn’t invest some of your money in international stocks; our GoldenEgg Investing® retirement investing plans suggest putting around 15-20% of your money into broad-based developed market funds and ETFs. But I don’t think the current rush into European stocks is entirely justified.
And a rush it has been. Last year, according to the Financial Times, investors pulled $100 billion from European stock funds amid worries about rising populism and fears of deflation. Countries like Germany and Switzerland were issuing long-term bonds paying negative interest rates (meaning you paid them for the privilege of borrowing money).
But this year, investors have scooped up more than $26 billion worth of European stock funds, $3 billion this week alone. Demand has picked up since Emanuel Macron’s smashing victory in the French election in May, which stopped populism in its tracks.
By some measures, the U.S. market is expensive. (Star Capital rates it the least attractively valued of 40 major global markets.) Its CAPE ratio, a measure of price times ten years of earnings developed by Nobel Prize winning economist Robert Shiller (and which has a poor record of predicting future returns), is 28x, vs. 17.8x for developed Europe. Europe’s regular P/E is about the same as the U.S. while its dividend yield of 3.1% tops the U.S.’s 2%. Earnings momentum is picking up in Europe, too.
But the big problem is currency. ECB president Mario Draghi declared this week that his bank will maintain its accommodative monetary policy and aggressive bond buying (quantitative easing, or QE) of €60 billion a month.
Meanwhile, our Fed is gradually raising rates and Chair Janet Yellen has signaled she would begin to shrink its balance sheet. Our QE3 ended almost three years ago.
Yet the dollar has continued to slide while the euro, at $1.17, is its strongest in months. If that euro strength continues, European-based multinationals will see their earnings take a hit.
Currency moves tend to even out over time, but right now I don’t find Europe particularly cheap or attractive.
CORRECTION: Last week I wrote that currency changes wiped out much of European markets’ excess gains, which is not true for U.S. investors. The text has been edited and corrected.