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Portfolio Insights by Brett Arends Archives | Email alerts
Jan. 9, 2012, 10:54 a.m. EST
By Brett Arends, MarketWatch
BOSTON (MarketWatch) "” How cheap is Europe these days?
Very. Especially for a U.S. investor. Not only have the stocks plummeted over there, but the currency has plummeted too.
Check it out.
According to FactSet, stock markets across the euro zone have slumped by about a fifth in less than a year.
Yet during the same time the euro itself has tumbled. Last spring one euro bought $1.475. Now it only buys about $1.275.
Bottom line? You're looking at a double sale.
Italy's stock market /quotes/zigman/1482176 XX:FTSEMIB -1.67% , measured in U.S. dollars, is down to levels last seen in the mid-1990s. It's about 0.7 times book value, with a dividend yield of 5.7%.
/quotes/zigman/1482176 FTSEMIB 14,401.55, -244.09, -1.67% The Italian market is cheap and it's even cheaper when measured in dollars.
It has now fallen "” again, when measured in dollar terms "” about 70% from the peak seen in 2006.
A wise old investor I know in London says you should always buy a "durable asset class" when it's fallen about 70% from the peak. It may fall further before it bottoms out. But on a five-year view, he says, it almost always pays off. He's been doing it successfully for 40 years, so I think he knows a thing or two.
Overall, the dividend yield on the entire euro zone's stock markets is up to 4.5%.
It is almost never that high. In the quarter century FactSet has been tracking it, the yield has typically been between 2% and 3.5%. Only during the financial crisis of 2008-09 did it, briefly, rocket higher.
By contrast, the yield on the U.S. market today is about half as much. You'll hunt hard for something paying 4.5% with an implicit inflation kicker.
The euro zone's stock markets in aggregate are trading now at about one times book value. The U.S.: More than twice book value.
Click to Play $(function () { $("#video_E67D529D-3479-4319-ACE2-C68DFE591FB7").click(function (e) { e.preventDefault(); MarketWatch.Video.loadAndStartVideo('E67D529D-3479-4319-ACE2-C68DFE591FB7', 'video_E67D529D-3479-4319-ACE2-C68DFE591FB7', '287', '162'); }); }); Data points to likely euro recessionAfter a summer and autumn of deals and agreements between euro-zone countries, the latest economic data out of euro zone indicates the region is moving closer to recession. Should the U.S. be concerned? WSJ 'Heard on the Street' editor Thorold Barker makes a stop on Mean Street to discuss. Photo: Getty Images.
Yes, the European banks need to raise a lot of money. They will be issuing new stock and using the cash to pay off debts. That will dilute current investors in those banks.
And yes, the financial crisis there will continue to hit sentiment until it is resolved. It's been about two years now, and counting.
But what really matters to investors isn't sentiment or even the economy. It's value. Buy low, sell high. Stocks are just claims on a company's future dividends. Nothing more. And, during a crisis, long-term investors need to remember that nearly all of those dividends will come in years five through infinity. In other words next quarter, even next year, doesn't matter very much.
You know that the mutual-fund managers and pension managers are too afraid to buy Europe right now. But remember, their No. 1 aim isn't to make their investors rich. It's to make themselves rich. The investors come a distant second. They will always do the thing that they can defend most easily in a committee room, not the thing which makes the best risk/reward sense for their investors.
Could the euro go lower? Sure. Purchasing power parity would imply it was even lower, maybe even $1.10.
But a falling currency is a good thing for many European companies, especially exporters. It improves their terms of trade. It makes their exports cheaper in overseas markets, while pricing out overseas competitors in Europe.
The betting against the euro already looks stretched. Sverre Holbek, senior analyst at Danske Bank, reports that net short positions against the euro are already at record levels. Net short bets against the euro account for a stunning 46% of the open interest in euro futures, according to the data tracked by the Commodity Futures Trading Commission. Meanwhile traders have continued to build hefty bets on further rises in the U.S. dollar. At some point the elastic gets stretched too far and it snaps back. Always happens.
Those looking to invest in Europe need to kick the tires of whatever they're buying. Index funds will hold plenty of financials: Over time that may work out, but you're accepting some dilution of those stocks first. So the iShares MSCI EMU (European Monetary Union) Index exchange-traded fund /quotes/zigman/264793/quotes/nls/ezu EZU +0.44% , with a yield of about 4%, has 18% of its portfolio in financials. The iShares MSCI Spain Index fund /quotes/zigman/260511/quotes/nls/ewp EWP +0.38% is a monstrous 40% invested in financials, while the equivalent Italy fund /quotes/zigman/260364/quotes/nls/ewi EWI -0.88% is 23% in financials.
You can try picking individual stocks if you like. At least you know what you're getting. American depositary receipts in German engineering giant Siemens /quotes/zigman/279102/quotes/nls/si SI +0.66% , down a third since last summer, are 10 times forecast earnings, yielding 2.9%. Italian oil and gas giant Eni /quotes/zigman/130557/quotes/nls/e E +0.41% , just seven times forecast earnings, yields 4.7%.
/quotes/zigman/1482176 Add FTSEMIB to portfolio XX:FTSEMIB FTSE MIB Index 14,401.55 -244.09 -1.67% Volume: 0.00 Jan. 9, 2012 5:30p var embeddedchart1846206270Chart = new EmbeddedChart('#embeddedchart1846206270', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'XX:FTSEMIB'); jQuery.data($('#embeddedchart1846206270').get(0), 'embeddedchart', embeddedchart1846206270Chart); /quotes/zigman/264793/quotes/nls/ezu Add EZU to portfolio EZU iShares Inc. MSCI EMU Index Fund $ 27.42 +0.12 +0.44% Volume: 120,429 Jan. 9, 2012 2:32p var embeddedchart1394297776Chart = new EmbeddedChart('#embeddedchart1394297776', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:EZU'); jQuery.data($('#embeddedchart1394297776').get(0), 'embeddedchart', embeddedchart1394297776Chart); /quotes/zigman/260511/quotes/nls/ewp Add EWP to portfolio EWP iShares MSCI Spain Index Fund $ 28.73 +0.11 +0.38% Volume: 24,377 Jan. 9, 2012 2:09p var embeddedchart278552534Chart = new EmbeddedChart('#embeddedchart278552534', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:EWP'); jQuery.data($('#embeddedchart278552534').get(0), 'embeddedchart', embeddedchart278552534Chart); /quotes/zigman/260364/quotes/nls/ewi Add EWI to portfolio EWI iShares MSCI Italy Index Fund $ 11.26 -0.10 -0.88% Volume: 307,465 Jan. 9, 2012 2:34p var embeddedchart278552541Chart = new EmbeddedChart('#embeddedchart278552541', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:EWI'); jQuery.data($('#embeddedchart278552541').get(0), 'embeddedchart', embeddedchart278552541Chart); /quotes/zigman/279102/quotes/nls/si Add SI to portfolio SI Siemens AG ADS $ 97.29 +0.64 +0.66% Volume: 397,467 Jan. 9, 2012 2:34p var embeddedchart1090805742Chart = new EmbeddedChart('#embeddedchart1090805742', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:SI'); jQuery.data($('#embeddedchart1090805742').get(0), 'embeddedchart', embeddedchart1090805742Chart); /quotes/zigman/130557/quotes/nls/e Add E to portfolio E ENI S.p.A. ADS $ 41.59 +0.17 +0.41% Volume: 414,607 Jan. 9, 2012 2:35p var embeddedchart372029401Chart = new EmbeddedChart('#embeddedchart372029401', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:E'); jQuery.data($('#embeddedchart372029401').get(0), 'embeddedchart', embeddedchart372029401Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //});Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for the Wall Street Journal.
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Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co. Collapse
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