The European Economy Shows Signs of Revival
Now May Be the Time to Explore European Equities
Why EU equities offer good value
More importantly, beyond the implications of today’s headlines, there are other reasons to consider raising exposures to the eurozone, and to Germany in the long term. The eurozone still offers relative value, although it can no longer be characterized as cheap. Looking at price-to-book ratios, for instance, eurozone stocks, as measured by the MSCI EMU Index (EZU), are trading at roughly a 42 percent discount to U.S. stocks, as measured by the MSCI USA Index (IVV), and a 23 percent discount to the broader market, as measured by the MSCI ACWI Index (ACWI). Similarly, German stocks, as measured by the MSCI Germany Index (EWG), are trading at a 37 percent discount to U.S. stocks and a 16 percent discount to the broader market (Source: MSCI, as of 5/29/2015). Moreover, European economy shows signs of revival.
Market Realist:
Eurozone (VGK) growth is expected to turn a corner in the latter half of this year. The European Union estimates that economic growth in 2015 will be 1.5% in the Eurozone, 0.2% higher than three months ago. Germany, in particular, is likely to see growth rebound.
The German industrial production index increased by 1.4% in May 2015. April was a strong month for German factory orders, according to the German ministry for economic affairs. The Deutsche Bundesbank has raised its economic growth forecast, from 0.8% in 2015 and 1.5% in 2016 to 1.5% in 2015 and 1.7% in 2016.
The Eurozone inflation rate ticked up by 0.3% and entered positive territory for the first time in five months, as you can see in the previous graph.
Among the developed nations (EFA), the Eurozone looks to be a bright spot now. The area is gaining economic momentum on account of low interest rates and an expansionary monetary policy. Nevertheless, although all economic indicators point to the fact that it may be a good time to increase your allocation to Europe, a wait and watch approach is likely to help investors. After all, the Greece debt drama will finally come to a boil next week.
Read on to the next part of this series to learn why you should look at currency-hedged trades and European equities.
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